26 February 2020
Supreme Court
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ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE INFRATECH LIMITED Vs AXIS BANK LIMITED

Bench: HON'BLE MR. JUSTICE A.M. KHANWILKAR, HON'BLE MR. JUSTICE DINESH MAHESHWARI
Judgment by: HON'BLE MR. JUSTICE DINESH MAHESHWARI
Case number: C.A. No.-008512-008527 / 2019
Diary number: 35907 / 2019
Advocates: RABIN MAJUMDER Vs


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CIVIL APPEAL NOS.  8512-8527 OF 2019 and connected cases

INDEX OF JUDGMENT

Sl. No. Contents Page 1. Introductory 1-3 2. Brief Outline and the Issues Involved 3-5 3. Parties and their respective roles and

interest in the matter 6-7

4. The transactions in question 8-11 5. The relevant factual and background  

aspects 11-18

6. The  Application  by  Interim Resolution  Professional  and  the order passed by NCLT

18-24

7. Appeals before NCLAT: the impugned  order

24-29

8. The relevant provisions 29-37

WHETHER  THE  TRANSACTIONS  IN  QUESTION  ARE PREFERENTIAL:

9. Broad  features  of  rival  contentions and submissions  

38-54

10. Insolvency  and  Bankruptcy  Code, 2016:  historical  background,  objects, scheme and structure  of  the  relevant parts

54-58

11. Preferential  transaction  at  a  relevant time: concept and connotations

58-64

12. Analysing Section 43 of the Code 64-74

13. Whether  impugned transactions are preferential,  falling within  the  ambit of sub-section (2) of Section 43 IBC

74-80

14. The requirements of  sub-section (4) of Section 43 IBC - related party and look- back period

80-89

15. Ordinary  course  of  business  or financial affairs

90-98

16. The concern expressed by lenders of JAL is legally untenable

99-100

(i)

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17. Summation:  The  transactions  in question are hit by Section 43 IBC

100

18. Search  and  commandeering  of preference at a relevant time

101-104

19. Other  aspects  of  the  application made  by  IRP  –  allegations  of transactions being undervalued and fraudulent  

104-107

WHETHER LENDERS OF JAL COULD BE CATEGORISED AS FINANCIAL CREDITORS OF JIL

20. Preliminary and background 107-109

21. Reasoning and Findings of NCLT 110-114

22. Rival submissions 114-130

23. Unique  position  of  financial creditor-  as  explained  in  Swiss Ribbons

130-134

24. Financial  debt  -  ratio  of  Pioneer Urban  

134-147

25. The  expressions  “means  and includes”  in  the  definition  clauses  - effect

147-152

26. The essentials  for  financial  debt  and financial creditor

152-158

27. The respondent mortgagees are not the financial  creditors of  corporate debtor JIL

158-171

28. Summation on second issue 171

29. Conclusion 171-172

                   Acknowledgment    172

(ii)

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REPORTABLE                                      

        IN THE SUPREME COURT OF INDIA                                       CIVIL APPELLATE JURISDICTION

   CIVIL APPEAL NOS.  8512-8527 OF 2019  

ANUJ JAIN INTERIM RESOLUTION  PROFESSIONAL FOR JAYPEE INFRATECH LIMITED             …….  Appellant(s)

  Versus

AXIS BANK LIMITED ETC. ETC.  …….  Respondent(s)

WITH

CIVIL APPEAL NOS. 6777-6797 OF 2019

CIVIL APPEAL NOS. 9357-77 OF 2019  (ARISING OUT OF DIARY NO.  32881 OF 2019)

JUDGMENT

Dinesh Maheshwari, J.

Introductory  

1. These appeals are essentially directed against the common order dated

01.08.2019 as passed by the National Company Law Appellate Tribunal, New

Delhi1 in  a  batch  of  appeals  preferred  by  various  banks  and  financial

institutions  whereby,  the  Appellate  Tribunal  set  aside  the  order  dated

16.05.2018, passed by the Adjudicating Authority, the National Company Law

1 Hereinafter also referred to as ‘the Appellate Tribunal’ or ‘NCLAT’

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Tribunal, Allahabad Bench2 on the application moved by the Interim Resolution

Professional3 in the Corporate Insolvency Resolution Process4 concerning the

Corporate Debtor Company viz., Jaypee Infratech Limited5 seeking avoidance

of  certain  transactions,  whereby  the  corporate  debtor  had  mortgaged  its

properties as collateral  securities for the loans and advances made by the

lender banks and financial institutions to Jaiprakash Associates Limited6, the

holding company of JIL, as being preferential, undervalued and fraudulent, in

terms of  Sections 43,  45  and 66  of  the  Insolvency  and Bankruptcy  Code,

20167.  

1.1. It may be noticed at the outset that the batch of appeals decided by the

impugned common order  dated 01.08.2019 also comprised of  two appeals

filed by the lenders of JAL, being Comp. App (AT) (Ins) No. 353 of 2018 and

Comp. App (AT) (Ins) No. 301 of 2018 that were preferred against the orders

passed by NCLT on 09.05.2018 and 15.05.2018 respectively, whereby NCLT

approved the decision of IRP rejecting the claims of such lenders of JAL to be

recognized as financial creditors of the corporate debtor JIL on the strength of

the mortgage created by the corporate debtor, as collateral security of the debt

of its holding company JAL. These two appeals also came to be allowed as

per the result recorded in the impugned order dated 01.08.2019, though the

2 Hereinafter also referred to as ‘the Tribunal’ or ‘NCLT’ or ‘the Adjudicating Authority’. 3 ‘IRP’ for short. 4 ‘CIRP’ for short. 5 ‘JIL’ for short; also referred to as ‘the corporate debtor’. 6 ‘JAL’ for short. 7 Hereinafter also referred to as ‘the Code’ or ‘IBC’.

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entire discussion and the final conclusion therein had only been in relation to

the order dated 16.05.2018 that was passed by NCLT on the application for

avoidance filed by IRP. The appellant of Civil Appeal D. No. 32881 of 20198,

IIFCL, apart from raising other contentions, has also questioned this aspect of

the order impugned that the aforesaid two appeals, involving the question as

to whether the lenders of JAL could be categorised as financial creditors of JIL

for the purpose of IBC,  have been allowed by NCLAT without recording any

findings and without any discussion in that regard.

Brief Outline and the Issues Involved

2. Before proceeding further, we may draw up a brief outline of the subject-

matter and the issues involved in these appeals.

2.1. As shall be noticed hereafter later, the CIRP concerning the corporate

debtor JIL has already undergone several rounds and circles of proceedings in

NCLT, NCLAT and at least twice over in this Court.

2.2. For what has been indicated in the introduction, it  is evident that two

major issues would arise in these appeals. One, as to whether the transactions

in  question  deserve  to  be  avoided  as  being  preferential,  undervalued  and

fraudulent, in terms of Sections 43, 45 and 66 of the Code; and second, as to

whether  the  respondents  (lender  of  JAL)  could  be  recognized as  financial

creditors of the corporate debtor JIL on the strength of the mortgage created

8  Now numbered as Civil Appeal Nos. 009357-77 of 2019

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by  the  corporate  debtor,  as  collateral  security  of  the  debt  of  its  holding

company JAL.  

2.3. For a preliminary insight into the first issue, suffice would be to notice

that during CIRP, the Interim Resolution Professional preferred an application

before  the  Adjudicating  Authority  seeking  orders  for  avoidance  of  the

impugned  transactions,  whereby  several  parcels  of  land  were  put  under

mortgage with the lenders of JAL, the holding company of JIL. The contention

of IRP, that the transactions in question were preferential,  undervalued and

fraudulent within the meaning of Sections 43, 45 and 66 of the Code, were

accepted in part  by the Adjudicating Authority,  the NCLT, in its order dated

16.05.2018 and necessary directions were issued for avoidance of at least six

of such transactions. In other words, in relation to such six transactions, the

security  interest  was ordered to be discharged and the properties involved

therein were vested in the corporate debtor, with release of encumbrances.

The  NCLAT,  however,  took  an  entirely  opposite  view  of  the  matter  and

upturned the order so passed by NCLT, while holding that the transactions in

question do not fall within the mischief of being preferential or undervalued or

fraudulent; and that the lenders in question (the lenders of JAL) were entitled

to exercise their rights under the Code. Aggrieved, the IRP, one of the creditors

of the corporate debtor JIL and the associations of home buyers, who have

invested  in  the  proposed  projects  of  JIL  and  JAL,  have  preferred  these

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appeals.

2.4. As regards the second issue, noticeable it is that during CIRP, two of the

respondent banks namely, ICICI Bank Limited and Axis Bank Limited, sought

inclusion in the category of financial creditors of JIL but IRP did not agree and

declined to  recognize  them as  such.  Being  aggrieved by  the  decisions  so

taken by IRP, the said banks preferred separate applications under Section

60(5) of the Code before NCLT while asserting their claim to be recognized as

financial  creditors  of  the corporate debtor  JIL,  on account  of  the securities

provided  by  JIL  for  the  facilities  granted  to  JAL.  The  NCLT  rejected  the

applications so filed by the said banks, by way of its orders dated 09.05.2018

and  15.05.2018  respectively,  while  concluding  that  on  the  strength  of  the

mortgage created by the corporate debtor JIL, as collateral security of the debt

of its holding company JAL, the lenders of JAL could not be categorised as

financial creditors of JIL for the purpose of the Code. As already noticed, the

appeals  against  the  said  orders  dated  09.05.2018  and  15.05.2018  are

purportedly allowed as per the result recorded in the impugned order dated

01.08.2019, but without any discussion in that regard. Aggrieved, one of the

lenders of  the corporate debtor JIL,  IIFCL (appellant of  Civil  Appeal D. No.

32881 of 2019) has also questioned this aspect of the order impugned while

asserting that such mortgagees cannot be taken as financial creditors of the

corporate debtor JIL.

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Parties and their respective roles and interest in the matter

3. In view of the issues arising for  determination in these appeals,  with

several parties carrying different roles, status and interests, worthwhile it would

be to narrate at the outset, in brief, the relevant particulars of the key parties

involved as follows:

3.1. Jaypee Infratech Limited (JIL):  

It is the corporate debtor company in whose relation CIRP is pending;

and the mortgage transactions concerning its properties were questioned in

the application filed by the Interim Resolution Professional. Such transactions

form the subject-matter of these appeals.  

3.2. Jaiprakash Associates Limited (JAL):  

It  is  the holding company of  JIL;  it  had approximately 71.64% equity

shareholding in JIL as on 31.03.2017. The impugned mortgage transactions

were entered into in favour of its lenders.  

3.3. Shri Anuj Jain:  

He is the Interim Resolution Professional in CIRP concerning JIL who

moved the application for avoidance of the transactions in question. He is the

appellant in Civil Appeal Nos. 8512-27 of 2019.

3.4. Jaypee  Greens  Krescent  Home  Buyers  Welfare  Association;  Jaypee

Kasa  Isles  Welfare  Association;  Jaypee  Kensington  Boulevard  Apartments

Welfare  Association;  Garden  Isle  Welfare  Association;  Jaypee  Klassic

Apartment  Welfare  Association;  Jaypee  Kube  Buyers  Welfare  Association;

Wish Town Property Owners Welfare Society; KRH Buyers Association ABL

Workplace:  

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They are the associations of  home buyers who have invested in the

projects of JIL and JAL. They are the appellants in Civil Appeal Nos. 6777-97

of 2019; and they also support the assertion of IRP that the transactions in

question cannot be countenanced.  

3.5 India Infrastructure Finance Company Limited:  

It is the financial creditor of the corporate debtor JIL and has filed Civil

Appeal  in Diary No. 32881 of  2019 while asserting that the transactions in

question need to be avoided; and that the lenders of JAL related with such

transactions cannot be the financial creditors of JIL for the purpose of CIRP in

question.

3.6 Axis  Bank  Limited;  Standard  Chartered  Bank  Limited;  ICICI  Bank

Limited;  State  Bank of  India;  United  Bank of  India;  UCO Bank;  The Karur

Vyasa Bank (P) Limited; L&T Infrastructure Finance Company Limited; Central

Bank of India; Canara Bank; Karnataka Bank Limited; IFCI Limited; Allahabad

Bank;  Jammu  &  Kashmir  Bank;  South  Indian  Bank  Limited;  Bank  of

Maharashtra and other banks and financial institutions:  

They are the lenders of JAL in whose favour the properties of JIL were

put under mortgage by way of the impugned transactions. They oppose the

assertions of appellants while maintaining that the transactions in question are

not  avoidable  and  are  valid,  investing  them  with  the  capacity  of  financial

creditors  of  JIL.  They  are  the  principal  contesting  respondents  in  these

appeals.

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The transactions in question

4. Having taken note of the principal contesting parties and their respective

interests, it would also be worthwhile to take note of the relevant particulars of

the properties and the transactions involved in this dispute. It may be usefully

noticed  that  out  of  seven  transactions  that  were  questioned  by  IRP,  the

Adjudicating Authority held that six of them were preferential, undervalued and

fraudulent  and  passed  the  orders  for  their  avoidance  while  accepting  the

contentions  of  IRP.  It  may  also  be  observed  that  five  out  of  these  six

transactions were preceded by previous mortgage transactions for securing

the  loans/facilities  to  JAL.  The  transactions  in  question,  with  previous

transactions and flow thereof, as given out during the course of submissions,

could be comprehensively viewed as under: -  

4.1. The transactions in favour of  the  Consortium of  Banks and Financial

Institutions:

Property/transaction in question Previous  transaction/s  and  flow thereof

Mortgage  deed  dated  29.12.2016  for 167.229 acres of land situated at Village Chhalesar  and  Chaugan,  Tehsil Etmadpur,  District  Agra,  Uttar  Pradesh executed by JIL in favour of Axis Trustee Services  Ltd.  to  provide  an  additional security  for  term loans  of  Rs.  21081.5 crores  sanctioned  as  a  consortium  to JAL.9

Initial  mortgage  deed  dated 24.02.2015  released  on  15.09.2015 and  re-mortgaged  on  15.09.2015 (changing  facility  amount  from  Rs. 3250  crores  (appx.)  to  Rs.  24109 crores);  thereafter  released  on 29.12.2016  and  again  re-mortgaged on  29.12.2016  (changing  facility amount from Rs. 24109 crores to Rs. 23491 crores).

9 Hereinafter also referred to as ‘Property No. 1’  

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Mortgage  deed  dated  29.12.2016  for 167.9615  acres  of  land  situated  at Village Tappal, Kansera and Jahangarh, Tehsil  Khair,  District  Aligarh,  Uttar Pradesh  executed  by  JIL  in  favour  of Axis Trustee Services Ltd. to provide as an additional  security for  term loans of Rs.21081.5  crores  sanctioned  by  the consortium to JAL.10

Initial  mortgage  deed  dated 24.02.2015  released  on  15.09.2015 and  re-mortgaged  on  15.09.2015 (changing  facility  amount  from  Rs. 3250  crores  (appx.)  to  Rs.  24109 crores);  thereafter  released  on 29.12.2016  and  again  re-mortgaged on  29.12.2016  (changing  facility amount from Rs. 24109 crores to Rs. 23491 crores).

4.2. The exclusive mortgage transactions in favour of ICICI Bank Limited:

Property/transaction in question Previous  transaction/s  and  flow thereof

Mortgage  deed  dated  07.03.2017  for 158.1739  acres  situated  at  Village Jaganpur  and  Aurangpur,  Uttar Pradesh, executed by JIL in favour of IDBI  Trustee-ship  Services  Limited  in the capacity of security trustee for term loan of Rs.1200 crores granted by ICICI Bank Limited to JAL against the facility agreement dated 25.05.2015.11

Initial  mortgage  deed  dated 12.05.2014 for 433.35 acres of land, followed  by  release  of  land admeasuring 240 acres vide release deed  dated  30.12.2015  along  with release  of  land  admeasuring  35.03 acres  vide  release  deed  dated 24.06.2016.  Further  release  of 158.1739 acres of  land vide release deed dated 07.03.2017 and thereafter re-mortgaged on 07.03.2017.

Mortgage  deed  dated  07.03.2017  for 151.0063  acres  situated  at  Village Jikarpur,  Tehsil  Khair,  District  Aligarh, Uttar  Pradesh,  executed  by  JIL  in favour  of  IDBI  Trustee-ship  Services Limited  in  the  capacity  of  security trustee for term loan of Rs.1200 crores

Initial  mortgage  deed  dated 12.05.2014  released  on  07.03.2017 and re-mortgaged on 07.03.2017.

10 Hereinafter also referred to as ‘Property No. 2’  11 Hereinafter also referred to as ‘Property No. 3’  

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granted by ICICI  Bank Limited to  JAL against  the  facility  agreement  dated 25.05.2015.12

4.3. The exclusive mortgage transaction in favour of the Standard Chartered

Bank Limited:

Property/transaction in question Previous  transaction/s  and  flow thereof

Mortgage  deed  dated  24.05.2016  for 25.0040 acres of land situated at Village Sultanpur,  Sector-128,  Noida,  District Gautam  Budh  Nagar,  Uttar  Pradesh executed by JIL in favour of IDBI Trustee- ship Services Ltd, as additional security, against  the  facility  agreement  dated 29.08.2012 between Standard Chartered Bank  and  JAL  of  Rs.400  crores.  The security was further extended for facility II for  Rs.450  crores  on  27.12.2012;  for facility  III  for  Rs.538.16  crores  on 29.04.2015;  for  facility  IV  for  Rs.81.84 crores  on  29.04.2015  and  for  working capital  facility  Rs.297  crores  on 29.08.2012.13

Initial  mortgage  deed  dated 24.06.2009,  extended  by  mortgage deed  dated  27.11.2012  (for increased facility amount of Rs. 1300 crores  as  compared  to  Rs.  900 crores earlier).

Vide  mortgage  on  23.03.2013, additional land admeasuring 25.0040 acres was added in the original land parcel  to  secure  increased  facility amount  of  Rs.  1750  crores  as compared to Rs. 1300 crores earlier against  the facility  agreement  dated 29.08.2012 for an amount of Rs. 400 crores. Security further extended for Facilities II, III and IV as mentioned in Column 1.  

The extended mortgage deed dated 23.03.2013  was  released  vide release  deed  dated  04.11.2015 (changing  facility  amount  from Rs.1750 crores to Rs.  1470 crores) and  re-mortgaged  on  24.05.2016 (increasing facility amount from 1470 crores to Rs. 1767 crores).  

12 Hereinafter also referred to as ‘Property No. 4’  13 Hereinafter also referred to as ‘Property No. 5’  

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4.4. The  sixth  transaction  in  question  had  been  the  exclusive  mortgage

transaction in favour of  State Bank of  India that  was not  preceded by any

earlier transaction; the same had been as under:-

Mortgage deed dated 04.03.2016 for 90 acres of land situated at Village  Chaugan Tehsil  Elmadpur,  District  Agra,  Uttar  Pradesh, executed by JIL in favour of State Bank of India against the facility agreement dated 26.03.2015 granting Short Term Loan Facility to JAL of Rs.1000 crores.14

4.5. Yet another transaction was questioned by IRP as being avoidable but

the Adjudicating Authority held the same to be not falling within the relevant

time  as  provided  under  Section  43  of  the  Code.  The  particulars  of  this

transaction are as follows:

Mortgage deed dated 12.05.2014 for 100 acres of land situated at Village  Tappal,  Tehsil  Khair,  District  Aligarh,  Uttar  Pradesh executed by JIL in favour of ICICI Bank Limited against the facility agreement  dated  12.12.2013  granting  Term  Loan  of  Rs.  1500 crores and overdraft amount of Rs. 175 crores to JAL.15

The relevant factual and background aspects

5. Having  taken  note  of  the  principal  parties  to  the  dispute  and  the

transactions/properties  involved,  but  before  dilating  on  the  issues,  we may

briefly narrate the background in which the present CIRP is underway as also

the orders passed by this Court, for ensuring its completion in accordance with

law and towards the larger benefit of stakeholders.  

14 Hereinafter also referred to as ‘Property No. 6’  15 Hereinafter also referred to as ‘Property No. 7’ (As regards this description, it is pointed out on behalf of the respondent ICICI Bank that it had been of ‘Term Loan of Rs. 1500 crores under the Corporate Rupee Loan Facility agreement and General Conditions dated 12.12.2013 and mortgage deed was dated 10.03.2014’)

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6. JAL is  stated  to  be  a  public  listed  company  with  more  than  5  lakh

individual  shareholders.   In the year 2003, JAL was awarded the rights for

construction of an expressway from Noida to Agra.  A concession agreement

was  entered  into  with  the  Yamuna  Expressway  Industrial  Development

Authority. Coming on the heels of  this project,  JIL was set up as a special

purpose vehicle.  Finance was obtained from a consortium of banks against

the partial mortgage of land acquired and a pledge of 51% of the shareholding

held by JAL.  Housing plans were envisaged for the construction of real estate

projects in two locations of the land acquired, one in Wish Town, Noida and

another  in  Mirzapur.  Several  other  aspects  of  the  dealings  by  these

companies, their creditors and other stakeholders need not be dilated for the

present purpose.   

6.1. The crucial  and relevant part  of  the matter is that  IDBI Bank Limited

instituted a petition under Section 7 of  the Code before the NCLT, seeking

initiation of Corporate  Insolvency  Resolution  Process  against  JIL,  while

alleging that JIL had committed a default in repayment of its dues to the tune

of  Rs.  526.11  crores.  JIL  filed  its  objections  to the petition  but  later  on,

withdrew the objections and furnished consent for resolution plan under the

provisions of the Code. On 09.08.2017, NCLT initiated the CIRP in respect of

JIL. An order of moratorium was issued under Section 14 by which,  the

institution  of  suits  and  continuation  of  pending  proceedings,  including

execution proceedings were prohibited and an Interim Resolution Professional

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was appointed. On 14.08.2017, IRP, in pursuance of the order of NCLT, called

for  submissions  of  claims  by  financial  creditors  in  Form-C,  by  operational

creditors in Form-B, by the workmen and employees in Form-E and by other

creditors in Form-F. On 16.08.2017, the Insolvency and Bankruptcy Board of

India made an amendment to its regulations and Regulation 9(a) was inserted

to include the claims by other creditors. On 18.08.2017, the Board released a

press note that  the home buyers could fill  in Form-F as they could not be

treated at par with financial and operational creditors.

6.2. The aforesaid position led to the proceedings in this Court  that were

dealt with in a batch of petitions led by Writ Petition (Civil) No. 744 of 2017:

Chitra Sharma and Ors.  v. Union of India and Ors. Several orders were

passed by this Court in the said batch of petitions from time to time, inter alia,

to the effect that IRP was permitted to take over management of JIL and was

directed  to  ensure  that  necessary  provisions  were  made  to  protect  the

interests of home buyers. Various orders were also made with directions to

JAL, as holding company of JIL, for making deposits in the Court, particularly

looking to the claim of refund being made by some of the home buyers. This

Court also took note of the facts that CIRP commenced on 09.08.2017; the

statutory period of 180 days for concluding the CIRP had come to an end; and

even the extended statutory period of 90 days also ended on 12.05.2018 but

then,  by  way  of  the  Amendment  Ordinance,  2018,  the  home buyers  were

accorded  the  statutory  recognition  as  financial  creditors  w.e.f.  06.06.2018.

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While finally disposing of the matters on 09.08.2018, this Court took note of

the interest of home buyers as also the creditors of JIL and JAL, the status of

proceedings  and  the  statutory  provisions  as  then  obtaining  and  ultimately

issued the following directions: -

“(i) In exercise of the power vested in this Court under Article 142 of the Constitution, we direct that the initial period of 180 days for the conclusion of the CIRP in respect of JIL shall commence from the date of this order. If it becomes necessary to apply for a further  extension  of  90  days,  we  permit  the  NCLT  to  pass appropriate orders in accordance with the provisions of the IBC;

(ii) We  direct  that  a  CoC  shall  be  constituted  afresh  in accordance with the provisions of the Insolvency and Bankruptcy (Amendment)  Ordinance,  2018,  more  particularly  the  amended definition of the expression “financial creditors”;

(iii) We permit the IRP to invite fresh expressions of interest for the submission of resolution plans by applicants, in addition to the three  short-listed  bidders  whose  bids  or,  as  the  case  may  be, revised bids may also be considered;

(iv) JIL/JAL and their promoters shall be ineligible to participate in the CIRP by virtue of the provisions of Section 29A;

(v) RBI  is  allowed,  in  terms of  its  application to  this  Court  to direct  the  banks  to  initiate  corporate  insolvency  resolution proceedings against JAL under the IBC;

(vi) The amount of Rs 750 crores which has been deposited in this  Court  by  JAL/JIL  shall  together  with  the  interest  accrued thereon  be  transferred  to  the  NCLT  and  continue  to  remain invested and shall abide by such directions as may be issued by the NCLT.”

6.3. It  had  been  during  pendency  of  the  aforesaid  proceedings  that  the

application leading to present appeals came to be filed by IRP on 06.02.2018,

complaining against the transactions in question. However, before taking note

of the matters involved in such application filed by IRP and, for completion of

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the narration about the orders passed by this Court, we may also point out that

during the CIRP of JIL,  an application came to be made by IDBI bank, for

excluding the period of pendency of the application for clarification regarding

the manner of counting of the votes of the concerned financial creditors, for the

purpose  of  the  period  of  270  days  for  completion  of  corporate  insolvency

resolution process but, during the pendency of such application, NCLT, by its

order dated 06.05.2019, called upon the authorities and the representatives of

allottees and others to file reply on the necessity to proceed further with CIRP

for considering the resolution plan received from the concerned bidder. The

IDBI Bank assailed this order of NCLT by way of an appeal before the NCLAT

that  came to  be decided on  30.07.2019 whereby,  NCLAT granted relief  to

exclude the period from 17.09.2018 to 04.06.2019 for the purpose of counting

270  days  of  CIRP period  and issued consequential  directions.  This  led  to

further  appeals  in  this  Court16,  which  were  considered  and  decided  on

06.11.2019.   

6.3.1. In the order dated 06.11.2019, we took note of the fact  that CIRP in

relation to JIL stood revived in view of the directions in Chitra Sharma (supra)

as  also  the  amendments  brought  about  in  IBC.  In  the  peculiar,  rather

extraordinary, situation obtaining in the matter, we passed the orders under the

plenary powers so as to ensure that an attempt was made for revival of the

corporate debtor JIL, lest it was exposed to liquidation process while taking

16 Being Civil Appeal No. 8437 of 2019 [@ D No. 27229 of 2019]: Jaiprakash Associates Ltd. & Anr. v. IDBI Bank Ltd. and connected case

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note  of  the  unanimity  amongst  the  parties  that  liquidation  of  JIL must  be

eschewed;  and  while  also  taking  note  of  the  time  limit  for  completion  of

Insolvency Resolution Process as per third proviso to Section 12(3),  which

came into effect from 16.08.2019. In the given circumstances, we passed the

following  order  for  the  purpose  of  substantial  and  complete  justice  to  the

parties and in the interest of all the stakeholders:

“i) We direct the IRP to complete the CIRP within 90 days from today.  In  the first  45 days,  it  will  be  open to  the IRP to  invite revised  resolution  plan  only  from  Suraksha  Realty  and  NBCC respectively,  who  were  the  final  bidders  and  had  submitted resolution  plan  on  the  earlier  occasion  and  place  the  revised plan(s)  before  the  CoC,  if  so  required,  after  negotiations  and submit report to the adjudicating authority NCLT within such time. In the second phase of 45 days commencing from 21st December, 2019, margin is provided for removing any difficulty and to pass appropriate orders thereon by the Adjudicating Authority.

ii) The pendency of any other application before the NCLT or NCLAT, as the case may be, including any interim direction given therein shall be no impediment for the IRP to receive and process  the  revised  resolution  plan  from the  abovenamed two bidders and take it to its logical end as per the provisions of the I & B Code within the extended timeline prescribed in terms of this order.

iii) We direct that the IRP shall not entertain any expression of interest  (improved)  resolution  plan  individually  or  jointly  or  in concert  with any other person,  much less ineligible in terms of Section 29A of the I & B Code.

iv) These directions are issued in  exceptional  situation in the facts of the present case and shall not be treated as a precedent.

v) This order may not  be construed as having answered the questions  of  law  raised  in  both  the  appeals,  including  as recognition of the power of the NCLT / NCLAT to issue direction or order not consistent with the statutory timelines and stipulations specified in the I & B Code and Regulations framed thereunder.”17

17 It may also be noticed that by another order dated 03.02.2020, while accepting the reasons stated in an application filed by the IRP pointing out various difficulties and unavoidable circumstances which

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7. Having thus referred to the orders previously passed in relation to the

CIRP in question, we may, for complete narration of the orders passed by this

Court,  also  refer  to  the  fact  that  in  this  batch  of  appeals,  the  extensive

arguments were finally  concluded on 10.12.2019.  Even while reserving the

orders,  looking to the facts  and circumstances of  the case,  we stayed the

operation of the order passed by NCLAT, insofar relating to the prayer of the

lender-banks of JAL for treating them as financial creditors of JIL. The relevant

part of the order dated 10.12.2019 reads as under: -

“Civil Appeal @ Diary No(s). 32881/2019

These appeals take exception to the decision of the National Company Law Appellate Tribunal allowing the appeal(s) filed by the lender-Banks of Jayprakash Associates Limited (JAL) claiming to be financial creditors(s) of Jaypee Infratech Limited (JIL). The National Company Law Tribunal had rejected that claim but we find  that  in  the  impugned  judgment,  without  dealing  with  the reasons  recorded  by  the  National  Company  Law  Tribunal,  the Appellate Tribunal allowed the appeal(s) filed by the stated lender- Banks(s), who were claiming to be the financial creditor(s) of JIL.

After fully hearing counsel for the parties, prima facie, we are of view that lender-Banks of JAL cannot be regarded as financial creditor(s) of JIL. We would elaborate on this aspect in our final judgment. Be that as it may, it is appropriate that we must stay the operation of the impugned judgment(s) of the Appellate Tribunal lest  any confusion occurs in the revival  process of  JIL and the constitution  of  Committee  of  Creditors  thereof,  in  view  of  the impugned order passed by the National Company Law Appellate Tribunal. Ordered accordingly.  

We clarify that the stay of operation is only in respect of order passed on the application(s) moved by the lender-Bank(s) of JAL before  the  National  Company  Law  Appellate  Tribunal  for  a declaration that they be regarded as financial creditor(s) of JIL and included in the Committee of Creditors of JIL.”

have delayed the culmination of proposal for approval of resolution plan, though submitted within the time frame prescribed by this Court, we had extended the time by four weeks for approval of the resolution plan, in the proceedings now being dealt with by the Principal Bench of NCLT at New Delhi.

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The Application by Interim Resolution Professional and the order passed

by NCLT

8. Having thus referred to the orders already passed in relation to the CIRP

in question, we may now advert to the application filed by IRP forming subject-

matter of the first issue involved in these appeals.  

9. The IRP, in terms of his duties under clause (j) of Section 25(2) of the

Code18,  made  the  application  under  consideration  before  the  Adjudicating

Authority stating, inter alia, that the corporate debtor was itself in dire need of

funds; and was facing severe liquidity crunch to complete the construction of

projects and deliver flats to home buyers as well as to honour the payment

obligations to financial creditors, including the Fixed Deposit Holders. It was

contended that JIL could have sold/mortgaged its unencumbered land to raise

funds to complete the construction of  flats  in  a timely manner and fulfil  its

obligation  to  its  creditors  and  prevent  value  deterioration  or  erosion  or

insolvency  but  then,  the  mortgages  in  question  were  created  in  a  highly

questionable manner and in complete disregard to the interests of the creditors

and stakeholders of the corporate debtor. Also, that the mortgage of land was

18 The relevant parts of Section 25 read as under:

“Duties of resolution professional. - (1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.

(2)  For  the  purposes  of  sub-section  (1),  the  resolution  professional  shall undertake the following actions, namely:-

*** *** *** (j) file application for avoidance of transactions in accordance with Chapter III, if any; …”

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in nature of asset stripping and was entered with intent to defraud the creditors

of the corporate debtor without obtaining the approval of shareholders.  

9.1. In  opposition  to  the  application,  it  was  contended  that  the  financial

position of the corporate debtor was very strong notwithstanding the temporary

financial crunch; that JAL was helping JIL in various ways and hence, creation

of  impugned mortgages  was not  unusual,  but  merely  reciprocal;  and such

reciprocal accommodation cannot be termed without consideration. It was also

contended that no transaction which was permitted by law and entered into

transparently could amount to ‘carrying on business for a fraudulent purpose’.

It was further contended that the impugned mortgages had not been created

on account of any antecedent debt liability owed by the corporate debtor; they

had been within the ordinary course of business of corporate debtor and the

transferees;  and  were  not  within  the  statutory  period  of  one  year  and,

therefore,  Section  43  of  IBC  would  not  apply.  It  was  maintained  that  the

transactions in question were reciprocal and could not be termed as without

consideration or undervalued. According to the contesting parties, when the

essential jurisdictional conditions were not satisfied, the provisions of Section

66 of IBC were not attracted.

10. The NCLT, after having heard the parties and having scanned through

the record, held that the transactions in question were to defraud the lenders

of the corporate debtor JIL, as 858 acres of unencumbered land owned by the

corporate debtor to secure the debt of the related party JAL was mortgaged in

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the midst of the corporate debtor’s immense financial crunch, while continuing

with default towards the home buyers and financial creditors and after it had

been declared as Non Performing Asset19, in utter disregard to fiduciary duties

and duty of care to the creditors; and further that the mortgage of land was

created without any counter guarantee from the related party and with no other

consideration being paid to the corporate debtor. The Tribunal was of the view

that at the time when the mortgage was created, the corporate debtor was

already in default to its lenders and it was unlikely that its lenders would have

provided no-objection for creation of mortgages to secure the debt of a related

party as that would have compromised not only the recovery of their dues but

also the interests of thousands of home buyers waiting for their homes with

investment of their hard earned money. The Tribunal also observed that even

though the nominees of lenders attended the Board Meeting of the corporate

debtor in which decision to mortgage the land was taken, but that cannot be

treated as approval or no-objection of lenders, as the lenders invariably have

covenants  in  the  loan  agreement  that  require  their  approval  for  creating

interest  in  favor  of  any  one of  the  unencumbered assets  of  the  borrower.

Moreover, directors of the corporate debtor (JIL) and the related party (JAL)

were well aware of the fact that the corporate debtor was in default and had

been declared as NPA by several  creditors.  The Tribunal,  thus, formed the

opinion that when the directors of the corporate debtor were fully aware that

19 ‘NPA’ for short

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they were in the twilight  zone and insolvency was imminent,  they ought to

have exercised due diligence in minimizing the potential loss to the creditors

but they entered into such transactions which  ex facie gave benefits to the

related  party  JAL,  with  a  clear  intent  to  defraud  the  creditors  of  JIL.  The

Tribunal further observed that the land in question could have been sold to

generate cash that would have been sufficient to complete the construction of

flats  and  the  home  buyers  are  directly  and  adversely  affected  by  such  a

decision.  

10.1. With respect to Section 43 of IBC, the NCLT held that the transaction of

creating a security interest by way of mortgage in favour of lenders of the third

party (JAL) on the unencumbered land of  the corporate debtor without any

consideration  or  counter  guarantee  cannot  be  treated  as  transfer  in  the

ordinary course of business or financial affairs of the corporate debtor. Further,

it did not benefit either the business or finances of the corporate debtor in any

way and hence, was not covered under ‘financial affairs’. The Tribunal held

that the phrase under consideration cannot be interpreted to mean that the

ordinary course of business also includes the transferee’s ordinary course of

business because transferee can never do the transfer himself; and that the

words ‘the transfer made’ indicate that they relate to the transferor and not the

transferee.  As regards ‘relevant  time’ for  the purpose of  sub-section (4)  of

Section  43  of  the  Code20,  the  Tribunal  observed  that  the  Code  itself  has

20 This “relevant time” for the purpose of avoidance of preferential transactions is now commonly  referred to as “look-back period”.

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provided a retrospective effect to the provisions of Section 43(4)(a) wherein it

is stated that ‘it  is given to a related party, during two years preceding the

insolvency commencement date’. This, according to NCLT, indicates that the

retrospective effect is laid down in the legislation itself and thus, the look-back

period  for  the  transactions  was  made  dependent  on  the  insolvency

commencement date and not on the date when the Insolvency and Bankruptcy

Code came into  effect  (01.12.2016).   The Tribunal,  therefore,  held  that  for

transactions of a related party, the look-back period was two years preceding

the  insolvency  commencement  date  and  hence,  the  relevant  period  for

examining  the  transactions  in  question  would  be  from  10.08.2015  to

09.08.2017 (date of commencement of CIRP).

10.2. The Tribunal made in-depth analysis of the facts of the case, particularly

those related with the transactions in question as also the provisions of law

applicable and, while rejecting the contentions urged on behalf of the opposing

parties, including JAL, observed and held as under:  

“After the elaborate discussion, we have decided that impugned transactions  are  preferential  transactions  as  defined  in  the subsection (2)(a) of Section 43 of insolvency and bankruptcy code 2016. We have found that corporate debtor Jaypee Infratech Ltd (JIL)  has  by  way  of  mortgage  of  unencumbered  land  created security interest in favour of lenders of the Jaiprakash Associates Ltd.  (JAL),  which  happens  to  be  the  holding  company  of  JIL, without any consideration. We have also found that the corporate debtor  was  facing  liquidity  crunch  and  their  accounts  were declared as NPA and even after formation of Joint Lender Forum, without  obtaining  approval  from  Joint  Lender  Forum, unencumbered land of the corporate debtor has been mortgaged in favour of lenders of JAL. There by this transfer has the effect of

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putting the JAL, one of the creditors of JIL in a beneficial position than it would have been in the event of distribution of assets being made by section 53 of the code. The  said  mortgage  of  immovable  properties,  i.e.  of  the unencumbered  land  of  the  corporate  debtor  has  been  made without any consideration to the corporate debtor. Therefore the said transaction is covered under the umbrella of Sec 45(1) of the Code and will be treated as an undervalued transaction as defined under section 45 of the Code. *** *** *** In  this  case,  we  have  found  that  impugned  transactions  are covered under preferential transactions as defined in section 43(2) (a) of the Code.  Therefore, it cannot be said that section 45 does not apply for these transactions. The impugned mortgage of  unencumbered land  parcels  of  the Corporate  Debtor  in  favour  of  lenders  of  the  JAL to  create  a security interest are transactions between the Corporate Debtor, lenders  of  JAL  and  JAL,  who  happens  to  be  an  Operational Creditor of the Corporate Debtor. It  is  true that the collateral security is common practice in loan transactions.   It  is  on  record  that  in  this  case,  the  Corporate Debtor was under liquidity crunch and its accounts were declared NPA by LIC and other creditors.   The Joint  Lender Forum was formed  to  deal  with  the  situation.  But  the  Corporate  Debtor entered into the transaction even without taking prior approval of Joint  Lender  Forum  and  mortgaged  its  unencumbered  land  in favour of the lenders of the JAL. In the circumstances stated above it is clear that the impugned preferential  transactions  are  also  undervalued  transactions  and covered under section 45(1)  of  the Code.   It  is  also clear that these transactions are undertaken during the relevant period of 2 years from the date of initiation of Corporate Insolvency Process as provided under section 46(1)(ii) of the Code.  Therefore, this issue is also decided in positive, in favour of applicant Resolution Professional and against the Corporate Debtor. In view of the above, it is clear that the mortgage of land of JIL in favour of lenders of JAL, amounts to transfer of interest in property of  JIL for  the benefit  of  its  creditor  i.e.  JAL and putting it  in  a beneficial  position  vis-à-vis  other  creditors  is  a  preferential transactions U/s 43(2)(a) & (b). The transactions were executed within the look back period of two years before the commencement of Insolvency proceeding and is therefore  covered U/s  43(4)(a).   Further,  transaction  cannot  be

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treated  is  in  ordinary  course  of  business  or  financial  affairs  of Corporate Debtor and is not excluded U/s 43(3).”

10.3. The Tribunal concluded in its order as follows:

“On the above basis, it is clear that the company application filed by the Resolution Applicant deserves to be allowed.  Hence, is allowed.

ORDER The  company  application  filed  by  the  Resolution  Professional under Sec. 66, 43 & 45 of the Insolvency and Bankruptcy 2016 is allowed.  The impugned transactions, details of which are given in the  schedule  of  the  judgment  are  declared  as  fraudulent, preferential  and  undervalued  transactions  as  defined  under section 66, 43 and 45 of the Code respectively. Transactions  given  in  the  following  schedule  of  property  have been found as preferential, undervalued and fraudulent, therefore, we  pass  the  order  for  release  and  discharge  of  the  security interest created by the Corporate Debtor in favour of lenders of the  Jaiprakash  Associates  Ltd.  under  the  provision  of  Section 44(c) of the Insolvency and Bankruptcy Code 2016.  We also pass an  order  under  Section  48(a)  of  the  Code  that  the  properties mortgaged by way of  preferential  and undervalued transactions shall  from  now  on  be  deemed  to  be  vested  in  the  Corporate Debtor.”21

Appeals before NCLAT: the impugned order

11. Assailing the aforesaid order passed by NCLT accepting the application

of IRP in relation to six of the mortgage transactions, the aggrieved parties

filed separate appeals before the Appellate Tribunal, the NCLAT. The Appellate

Tribunal  took  note  of  the  facts  of  the  case  and  the  rival  contentions  and

21 In the schedule  to the order  aforesaid,  NCLT gave out  the description of  six  transaction with particulars of the properties which were treated as preferential, undervalued and fraudulent and also gave the description of one transaction that was not coming within the ambit of ‘relevant time’ per Section 43 of  the Code. (as fully  taken note of  in paragraph 4 and its sub-paragraphs under the heading ‘Transactions in question’ ibid.).

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proceeded  to  upturn  the  order  passed  by  NCLT on  the  considerations  as

indicated infra.

11.1. As regards the assertion of IRP that the transactions in question were

preferential transactions within the relevant time as envisaged by Section 43 of

the Code, the NCLAT observed that the corporate debtor had created interest

over  its  property,  but  such interest  had not  been created in  favour  of  any

creditor or a surety or a guarantor for or on account of an antecedent financial

debt or operational debt or other liabilities owed by the corporate debtor and

hence, Section 43(2)(a) of the Code was not attracted. It was further observed

that the mortgages in question were made in the ordinary course of business

and financial affairs of the transferees, ruling out the applicability of Section 43

as such and hence, the Adjudicating Authority had no power to pass the order

under Section 44 of the Code. The Appellate Tribunal observed and held, inter

alia, as follows:

“62.  In  the  present  case,  the  ‘Corporate  Debtor’  has  created interest  on  the  property  of  the  ‘Corporate  Debtor’,  but  such interest has not been created in favour of any creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational  debt  or  other  liabilities  owed  by  the  ‘Corporate Debtor’.

63.  The  aforesaid  interest  on  the  property  of  the  ‘Corporate Debtor’  has  been  created  in  all  these  cases  with  regard  to financial debt given by the Appellants to ‘Jaiprakash Associates Ltd.’, which is not the ‘Corporate Debtor’.

64.  Thus,  it  is  clear  that  the  interest  on  the  property  of  the ‘Corporate  Debtor’  has  not  been  created  in  favour  of  the Appellants- ‘Financial Creditors’ of an antecedent financial debt of the  Appellants  owed  by  the  ‘Jaypee  Infratech  Ltd.’ (‘Corporate

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Debtor’). Therefore, we hold that clause (a) of sub-section (2) of Section 43 is not attracted in any of the case of the Appellants Bank,  thereby  none  of  the  Appellants  Bank  come  within  the meaning  of  ‘deemed  to  have  given  a  preference’,  as  used  in Section  43.  Therefore,  the  mortgage(s)  created  in  their  favour cannot  be annulled on the ground of  preferential  transaction in terms of Section 43 (2) (a) of the ‘I&B Code’.

65. Clause (b) of sub-section(2) of Section 43 relates to transfer under clause (a) of sub-section (2) of Section 43, which in effect puts  such  creditor  or  a  surety  or  a  guarantor  in  a  beneficial position than it would have been in the event of a distribution of assets being made in accordance with Section 53. As clause (a) of sub-section  (2)  of  Section  43  is  not  attracted,  the  question  of applicability of clause (b) of sub-section (2) of Section 43 does not arise.

66.  Apart  from  the  aforesaid  position  of  law  in  respect  of mortgage, in question, as per sub-section (3) of Section 43, for the purposes of sub-section (2),  “a preference shall  not include the transfer made in the ordinary course of the business or financial affairs of the ‘Corporate Debtor’ or the transferee”. The mortgages in question which were made in favour of the Appellants-Banks and Financial Institutions have been made in ordinary course of business and financial affairs of the transferee, as apparent from the relevant facts.

67. Therefore, we hold that Section 43 is not attracted to any of the transaction/mortgage(s) made in favour of the Appellants.”

11.2. The Appellate Tribunal further proceeded to hold that the provisions of

Section  45  of  Code,  for  avoidance  of  undervalued  transactions,  were  not

applicable in relation to the transactions in question while observing as under:-

“71.  For  holding  a  transaction  undervalued,  the  ‘Resolution Professional’/‘Liquidator’ is required to examine the transactions which were made during ‘the relevant period’ as prescribed under Section 46, if any of it is undervalued. As per sub-section (2) of Section  45,  the  transaction  shall  be  considered  ‘undervalued’ ‘where the ‘Corporate Debtor’ makes a gift to a person or enters into a transaction with a person which involves the transfer of one or more assets by the ‘Corporate Debtor’ for a consideration the

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value  of  which  is  significantly  less  than  the  value  of  the consideration  provided  by  the  ‘Corporate  Debtor’  and  such transaction has not taken place in the ordinary course of business of the ‘Corporate Debtor’.’

72. In these appeals, we find that the transactions as has been made i.e.  mortgage(s) in favour of the Appellants as and when made  against  the  amount  payable  by  ‘Jaiprakash  Associates Limited’ (borrower), the amount is not payable by the ‘Corporate Debtor’. Therefore, clause (a) of sub-section (2) of Section 45 is not attracted. For the same very reason, clause (b) of sub-section (2) of Section 43 or Section 45 cannot be made applicable with regard  to  transaction  in  question  which  are  not  related  to  any payment due from the ‘Corporate Debtor’.

73. As Section 44 is not attracted, it  is not necessary to notice Section 46 which is not attracted and, therefore, the Adjudicating Authority has no power to pass any order under Section 48 of the ‘I&B Code’. ”

11.3. With respect to Section 66 of the Code dealing with fraudulent trading or

wrongful  trading, the Appellate Tribunal observed that the corporate debtor,

being one of  the group company, like a guarantor,  had executed mortgage

deeds  in  favour  of  the  lender  banks  and  financial  institutions;  and  the

transactions were in the ordinary course of business of the corporate debtor.

Thus, according to NCLAT, in the absence of any contrary evidence to show

that they were made to defraud the creditors of the corporate debtor or for any

fraudulent purpose, it was not open to the Adjudicating Authority to hold that

the mortgage deeds in question were made by way of transactions within the

meaning  of  ‘fraudulent  trading’ or  ‘wrongful  trading’ under  Section  66.  The

Appellate Tribunal held,-

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“76. In the present case, we have noticed that the transactions in question i.e. mortgage(s) were made in favour of the ‘Banks and Financial Institutions’ by the ‘Corporate Debtor’ (‘Jaypee Infratech Limited’)  in  the  ordinary  course  of  business  of  the  ‘Corporate Debtor’.  The  Appellants-Banks  and  Financial  Institutions  have given  loans  to  the  holding  Company  namely-‘Jaiprakash Associates  Limited’.  The  ‘Corporate  Debtor’  being  one  of  the group company, like a guarantor, executed mortgage deed(s) in favour  of  the  Appellants-‘Banks  and  Financial  Institutions’.  We have  seen  that  none  of  the  transactions  were  ‘preferential transaction’ or ‘undervalued transaction’. It has not been alleged that  the  transactions,  in  question,  were  made  to  defraud  the creditors in terms of Section 49 so allegation has been made that such transactions amount to ‘extortionate credit’ as defined under Section 50.  Therefore,  the Adjudicating Authority  in  absence of any such finding is not empowered to pass order under Section 51. Further, as we have held that the transactions were made in the  ordinary  course  of  business  in  absence  of  any  contrary evidence to show that they were made to defraud the creditors of the  ‘Corporate  Debtor’  or  for  any  fraudulent  purpose,  on  mere allegation made by the ‘Resolution Professional’, it was not open to  the  Adjudicating  Authority  to  hold  that  mortgage  deeds,  in question, were made by way of transactions which come within the  meaning  of  ‘fraudulent  trading’  or  ‘wrongful  trading’  under Section 66.”

11.4. The Appellate Tribunal, therefore, allowed the appeals and set aside the

impugned  order  passed  by  NCLT on  16.05.2018  in  so  far  relating  to  the

lenders in question in the following:-

“80. For the reasons aforesaid, we set aside the impugned order dated 16th May, 2018 so far it relates to the Appellants. In view of such findings, the Appellants-‘Axis Bank Ltd’, ‘Standard Chartered Bank’,  ‘ICICI  Bank  Ltd.’,  ‘State  Bank  of  India’,  ‘Jai  Prakash Associates  Ltd.’,  ‘Bank of  Maharashtra’,  ‘United  Bank of  India’, ‘Central Bank of India’, ‘UCO Bank’, ‘Karur Vyasa Bank (P) Ltd.’, ‘L&T  Infrastructure  Finance  Company  Ltd.’,  ‘Canara  Bank’, ‘Karnataka Bank Ltd.’,  ‘IFCI Ltd.’,  ‘  Allahabad Bank’,  ‘Jammu & Kashmir Bank’, and ‘The South Indian Bank Ltd.’ are entitled to exercise their rights under the ‘I&B Code’.

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81. All the appeals are allowed. However, we make it clear that we have not made any observations with regard to the Promoters or Directors in absence of any appeal preferred on their behalf. No costs.”

The relevant provisions

12. For comprehension of the subject-matter and appropriate dealing with

the issues involved, before proceeding further, suitable it would be to take note

of the relevant statutory provisions.  

12.1. It  may be observed that while generally,  the expressions used in the

Code are defined in Section 3 thereof but then, the expressions employed for

the purpose of  Part  II  of  the Code,  dealing with  insolvency resolution and

liquidation of corporate persons, are defined in Section 5 thereof. The relevant

definitions as occurring in Sections 3 and 5 are as under:-

“Section 3(4): "charge" means an interest or lien created on the property  or  assets  of  any person or  any of  its  undertakings or both, as the case may be, as security and includes a mortgage;

Section 3(6): "claim" means-- (a) a right  to payment,  whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

Section 3(8): "corporate debtor" means a corporate person who owes a debt to any person;

Section 3(10):  "creditor" means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder;

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Section 3(11): "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

Section 3(12): "default" means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;

Section 3(30): "secured creditor" means a creditor in favour of whom security interest is created;

Section 3(31): "security interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of  an obligation and includes mortgage,  charge,  hypothecation, assignment  and  encumbrance  or  any  other  agreement  or arrangement securing payment or performance of any obligation of any person: Provided  that  security  interest  shall  not  include  a  performance guarantee;

Section  3(33):  "transaction"  includes  a  agreement  or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor;

Section  3(34):  "transfer"  includes  sale,  purchase,  exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien;

Section  3(35):  "transfer  of  property"  means  transfer  of  any property and includes a transfer of any interest in the property and creation of any charge upon such property;

Section 5(5A):  "corporate guarantor" means a corporate person who is the surety in a contract of guarantee to a corporate debtor;

Section 5(7): "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

Section 5(8): "financial debt" means a debt alongwith interest, if any,  which  is  disbursed  against  the  consideration  for  the  time value of money and includes- (a)    money borrowed against the payment of interest; (b)   any  amount  raised  by  acceptance  under  any  acceptance credit facility or its de-materialised equivalent;

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(c)  any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d)   the amount  of  any liability  in  respect  of  any lease or  hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e)   receivables sold or discounted other than any receivables sold on non-recourse basis; (f)   any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; Explanation.-- For the purposes of this sub-clause,-- (i)   any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and (ii)   the expressions, "allottee" and "real estate project" shall have the meanings respectively  assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);22

(g)   any  derivative  transaction  entered  into  in  connection  with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h)   any counter-indemnity obligation in respect of a guarantee, indemnity,  bond,  documentary  letter  of  credit  or  any  other instrument issued by a bank or financial institution; (i)    the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;

Section 5(20):  “operational creditor” means a person to whom an operational  debt  is owed and includes any person to whom such debt has been legally assigned or transferred;

Section 5(21): “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government  or any local authority;  

Section 5(24): “related party”, in relation to a corporate debtor, means –

22 This explanation was inserted w.e.f. 06.06.2018.

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(a)   a director or partner of the corporate debtor or a relative of  a director or partner of the corporate debtor; (b) a  key  managerial  personnel  of  the  corporate  debtor  or  a relative of a key managerial personnel of the corporate debtor; (c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner; (d) a private company in which a director, partner or manager of the  corporate  debtor  is  a  director  and  holds  along  with  his relatives, more than two per cent of its share capital; (e) a public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives, more than two per cent of its paid-up share capital; (f) anybody  corporate  whose  board  of  directors,  managing director or manager, in the ordinary course of business, acts on the  advice,  directions  or  instructions  of  a  director,  partner  or manager of the corporate debtor; (g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the  advice,  directions  or  instructions  of  a  director,  partner  or manager of the corporate debtor; (h) any  person  on  whose  advice,  directions  or  instructions,  a director,  partner  or  manager  of  the  corporate  debtor  is accustomed to act; (i) a  body  corporate  which  is  a  holding,  subsidiary  or  an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary; (j) any person who controls more than twenty per cent of voting rights in the corporate debtor on account of ownership or a voting agreement; (k) any person in whom the corporate debtor controls more than twenty  per  cent  of  voting  rights  on  account  of  ownership  or  a voting agreement; (l) any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor; (m) any person who is associated with the corporate debtor on account of ---

(i) participation  in  policy  making  process  of  the  corporate debtor; or

(ii) having more than two directors in common between the corporate debtor and such person; or  

(iii) interchange  of  managerial  personnel  between  the corporate debtor and such person; or

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(iv) provision of essential technical information to, or from, the corporate debtor;”

12.2. The concept and consequences of preferential transactions at a relevant

time are provided in Sections 43 and 44 of  the Code,  which may also be

usefully extracted as follows:-

“Section 43. Preferential transactions and relevant time.-

(1) Where the liquidator or the resolution professional, as the case may  be,  is  of  the  opinion  that  the  corporate  debtor  has  at  a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44. (2)  A  corporate  debtor  shall  be  deemed  to  have  given  a preference, if— (a)  there  is  a  transfer  of  property  or  an interest  thereof  of  the corporate  debtor  for  the  benefit  of  a  creditor  or  a  surety  or  a guarantor  for  or  on account  of  an antecedent  financial  debt  or operational debt or other liabilities owed by the corporate debtor; and (b)  the transfer  under clause (a)  has the effect  of  putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event  of  a distribution of  assets being made in accordance with section 53. (3)  For  the purposes of  sub-section (2),  a preference shall  not include the following transfers— (a)  transfer  made  in  the  ordinary  course  of  the  business  or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that—

(i) such security interest secures new value and was given at the time of  or  after  the signing of  a  security  agreement  that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and (ii) such transfer was registered with an information utility on or before  thirty  days  after  the  corporate  debtor  receives possession of such property:

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Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor. Explanation.—For the purpose of sub-section (3) of this section, "new value" means money or its worth in goods, services, or new credit,  or  release  by  the  transferee  of  property  previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this  Code,  including  proceeds  of  such  property,  but  does  not include a financial debt or operational debt substituted for existing financial debt or operational debt. (4) A preference shall be deemed to be given at a relevant time, if — (a) It is given to a related party (other than by reason only of being an  employee),  during  the  period  of  two  years  preceding  the insolvency commencement date; or (b) a preference is given to a person other than a related party during  the  period  of  one  year  preceding  the  insolvency commencement date.

Section 44. Orders in case of preferential transactions.- (1) The Adjudicating Authority, may, on an application made by the resolution  professional  or  liquidator  under  sub-section  (1)  of section 43, by an order: (a) require any property transferred in connection with the giving of the preference to be vested in the corporate debtor; (b)  require  any  property  to  be  so  vested  if  it  represents  the application  either  of  the  proceeds  of  sale  of  property  so transferred or of money so transferred; (c)  release  or  discharge  (in  whole  or  in  part)  of  any  security interest created by the corporate debtor; (d) require any person to pay such sums in respect of  benefits received  by  him  from  the  corporate  debtor,  such  sums  to  the liquidator  or  the  resolution  professional,  as  the  Adjudicating Authority may direct; (e)  direct  any  guarantor,  whose  financial  debts  or  operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate; (f) direct for providing security or charge on any property for the discharge  of  any  financial  debt  or  operational  debt  under  the order, and such security or charge to have the same priority as a

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security or charge released or discharged wholly or in part by the giving of the preference; and (g)  direct  for  providing  the  extent  to  which  any  person  whose property is so vested in the corporate debtor, or on whom financial debts or operational  debts are imposed by the order,  are to be proved  in  the  liquidation  or  the  corporate  insolvency  resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference: Provided that an order under this section shall not— (a)  affect  any  interest  in  property  which  was  acquired  from  a person other  than the  corporate  debtor  or  any  interest  derived from such interest and was acquired in good faith and for value; (b) require a person, who received a benefit from the preferential transaction  in  good  faith  and  for  value  to  pay  a  sum  to  the liquidator or the resolution professional. Explanation I.-For the purpose of this section, it  is clarified that where a person, who has acquired an interest  in property from another  person  other  than  the  corporate  debtor,  or  who  has received a benefit from the preference or such another person to whom the corporate debtor gave the preference, — (i) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor; (ii) is a related party,  it shall be presumed that the interest was acquired or the benefit was received otherwise than in good faith unless the contrary is shown. Explanation  II.-A  person  shall  be  deemed  to  have  sufficient information  or  opportunity  to  avail  such  information  if  a  public announcement  regarding  the  corporate  insolvency  resolution process has been made under section 13.”

12.3. As the transactions in question are the mortgage(s)  of  the assets  of

corporate debtor JIL, the concept and connotations of mortgage, as occurring

in Section 58 of the Transfer of Property Act, 188223, could also be usefully

noticed as under:-

23 Hereinafter also referred to as ’the Transfer of Property Act’.

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“58.  “Mortgage”,  “mortgagor”,  “mortgagee”,  “mortgage- money” and “mortgage-deed” defined.- (a) A mortgage is the transfer of an interest in specific immoveable property  for  the  purpose  of  securing  the  payment  of  money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if  any)  by  which the transfer  is  effected is  called a  mortgage- deed. (b) Simple  mortgage.-Where,  without  delivering  possession  of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in  the event  of  his  failing to  pay according to  his  contract,  the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee. (c) Mortgage  by  conditional  sale.-Where,  the  mortgagor ostensibly sells the mortgaged property-  

on  condition  that  on  default  of  payment  of  the  mortgage- money on a certain date the sale shall become absolute, or  

on condition that on such payment being made the sale shall become void, or  

on condition that  on such payment  being made the buyer shall transfer the property to the seller,  

the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale:

Provided that no such transaction shall be deemed to be a mortgage,  unless  the  condition  is  embodied  in  the  document which effects or purports to effect the sale. (d) Usufructuary  mortgage.-Where  the  mortgagor  delivers possession or expressly or by implication binds himself to deliver possession  of  the  mortgaged  property  to  the  mortgagee,  and authorises  him  to  retain  such  possession  until  payment  of  the mortgage-money,  and to  receive  the  rents  and profits  accruing from the property  or  any part  of  such rents  and profits  and to appropriate  the  same  in  lieu  of  interest,  or  in  payment  of  the mortgage-money, or partly in lieu of interest or partly in payment of the  mortgage-money,  the  transaction  is  called  an  usufructuary mortgage and the mortgagee an usufructuary mortgagee.

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(e) English  mortgage.-Where  the  mortgagor  binds  himself  to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the  mortgage-money  as  agreed,  the  transaction  is  called  an English mortgage. (f) Mortgage by deposit of title-deeds.-Where a person in any of the following towns, namely, the towns of Calcutta, Madras, and Bombay,  and  in  any  other  town  which  the  State  Government concerned may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immoveable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds. (g) Anomalous mortgage.- A mortgage which  is  not  a  simple mortgage,  a  mortgage  by  conditional  sale,  an  usufructuary mortgage, an English mortgage or a mortgage by deposit of title- deeds within the meaning of this section is called an anomalous mortgage.”

12.4. The provisions contained in Sections 124, 126 and 127 of the Indian

Contract  Act,  187224 shall  also  have  bearing  on  the  issues  at  hand  and

hence, the same may also be noted as follows:-

“124. “Contract of indemnity” defined.- A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity.”

126.  ‘Contract of  guarantee’,  ‘surety’,  ‘principal  debtor’ and ‘creditor’ – A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called  the  ‘principal  debtor’,  and  the  person  to  whom  the guarantee is  given is  called the ‘creditor’.  A guarantee may be either oral or written.

127.  Consideration  for  guarantee.-  Anything  done,  or  any promise made, for the benefit  of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.”  

24 Hereinafter also referred to as ‘the Contract Act’.

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WHETHER THE TRANSACTIONS IN QUESTION ARE PREFERENTIAL

Broad features of rival contentions and submissions  

13. As noticed, being aggrieved by the order so passed by NCLAT, three

sets  of  parties  have  preferred  these  appeals.  Multidimensional  and  wide-

ranging submissions have been made by learned counsel for the respective

parties, raising the issues as to whether the transactions in question could be

said to be preferential and/or undervalued and/or fraudulent, essentially within

the meaning of Sections 43, 45, 49 and 66 of the Code. Elaborate submissions

have also been made raising the issue as to whether the lenders of JAL, in

whose  favour  the  security  interest  by  way  of  impugned  transactions  were

created, would fall in the category of ‘financial creditors’ of the corporate debtor

JIL.   

14. Having regard to the overall circumstances, appropriate it would be to

deal, at the first, with the contentions related with the issue as to whether the

transactions in  question are preferential  transactions within  the meaning of

Section 43 of the Code.  We may briefly summarize the contentions of the

appellants, with particular focus on this issue as infra:

Interim  Resolution  Professional  for  Jaypee  Infratech  Limited  –  the appellant In C.A. No. 8512-8527 of 2019

14.1. It  has been contended on behalf  of  the  appellant  Interim Resolution

Professional, who moved the application for avoidance of the transactions in

question, that the impugned transactions have the effect of putting JAL, which

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is  an equity  shareholder and an operational  creditor  (for  an amount  of  Rs.

261.77 crores) of the corporate debtor JIL, in a beneficial position than it would

have been in the event of distribution of assets under Section 53 of the Code

vis-à-vis other creditors; and that if the transactions are held to be valid, the

liability of JAL towards its own creditors gets secured and becomes realisable

from  the  value  of  the  mortgaged  properties  whereby,  JAL’s  liabilities  are

reduced and JAL gets  benefitted in  exclusion of  creditors  of  the corporate

debtor JIL. It is submitted that, in the event of distribution of assets in terms of

Section 53 of IBC, for the sake of argument, even if JAL is to get full value of

its shares (Rs. 995 crores), such amount is significantly less than the value of

assets  which  have  been  mortgaged  by  way  of  impugned  transactions  for

satisfaction of debts owed by JAL to its lenders.

14.1.1. It is submitted on behalf of the appellant Interim Resolution Profession

that the assets in question were released from the earlier mortgages and fresh

mortgages were created during the look-back period with increased/enhanced

amount of facilities as provided under each individual transaction. The said so-

called re-mortgage essentially amounts to a fresh mortgage within the relevant

time of two years before the date of commencement of CIRP and was not

done in the ordinary course of business of JIL and hence, is hit by Section 43

of the Code.  

14.1.2. It is further urged that in the exclusionary clause under Section 43(3)

(a),  which  pertains  to  the  transfer  being  made  in  the  ordinary  course  of

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the business or financial affairs of the corporate debtor or the transferee, the

expression “or” will have to be read conjunctively and not in the alternative.

That is to say, the word “or” will have to be read as “and”. This is because if

“or”  is  read  textually,  it  would  mean  that  an  overwhelming  majority  of

transactions  like  the  present  one,  whereby  banks  who  would  accept  the

security  interest  over  properties  belonging to  a  third  party,  after  disbursing

financial  facilities  to  its  loan,  would  get  out  of  the  net  of  “preferential

transactions”,  even  if  the  transfer  in  question  is  not  made  in  the  ordinary

course of business of the corporate debtor. It is submitted that the intention of

legislature  behind  enacting  a  provision  like  Section  43  is  that  preferential

transactions are avoided so that such assets would be available either with the

resolution professional or with the liquidator, as the case may be, to put the

corporate debtor back on its wheels or if that is not possible, to ensure that the

creditors of the corporate debtor get a fair deal. With reference to the decisions

of this Court in State of Bombay v. R.M.D. Chamarbaugwala and Anr.: 1957

SCR 874 and  Mazagaon Dock Ltd v. Commissioner of Income-Tax and

Excess Profits Tax:  1959 SCR 848, it is submitted that on the well-known

cannons of interpretation, “or” could be read as “and” if it is warranted to bring

the provision in question in sync with the intention of the legislature which is to

be discerned.  

14.1.3.It is contended that Section 43 ought to be read keeping in mind the

intention of the legislature in introducing such provision, which had been to

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protect  the  creditors  against  siphoning  away  of  corporate  assets  by  the

management of the company, who have special knowledge of the company’s

financial troubles by virtue of its position.  

India Infrastructure Finance Company Limited – the appellant in C.A.@ D No. 32881 of 2019.

14.2. This appellant is one of the entities who has advanced loan to JIL and

has preferred appeal with permission, assailing the order passed by NCLAT

and maintaining,  inter  alia,  that  in any case,  the lenders of  JAL cannot be

taken as ‘financial creditors’ of JIL. While referring to the theory behind the

provisions for avoidance of certain transactions, it is submitted on behalf of this

appellant that the Court should consider substance rather than legal form in

evaluating the true economic effect of a transaction or a set of transactions in

applying  the  relevant  provisions.  On  behalf  of  this  appellant,  the  following

submissions  have  been  made  in  regard  to  the  relevant  expressions  and

phrases occurring in the provisions under consideration:  

Ordinary Course of Business

14.2.1. It  is  submitted  that  mortgages  could  not  have  been  made  in  the

ordinary course of  business of  the corporate debtor  JIL,  as it  is  difficult  to

fathom why a subsidiary would furnish security to its parent company in the

ordinary course and, on the contrary, it is the parent company which at times

furnishes security on behalf of its subsidiary since it derives economic value

from the subsidiary. According to the appellant, it is difficult to appreciate that

when the corporate debtor JIL was itself reeling under financial stress, why it

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would routinely  undertake to secure the indebtedness of  JAL by furnishing

such high valued securities and that too when the amount of debt secured by

way of mortgaging the assets of the corporate debtor increased from Rs. 3,000

crores to approximately Rs. 24,000 crores and the number of creditors also

went up from 2 to 24 with respect to the consortium mortgage. It is submitted

that  even  though  creation  of  third  party  security  is  a  normal  practice,  the

creation of every third party security cannot be always deemed to have been

done in the ordinary course of business; that such ‘ordinary course’ has to be

determined under  the circumstances when such transactions were entered

into;  and,  considering that  JIL was declared NPA and had defaulted on its

indebtedness to some of  its lenders,  securing of  JAL’s indebtedness under

such circumstances cannot be construed to have been done in the ordinary

course of business of the corporate debtor JIL. The learned counsel for the

appellant has referred,  inter alia, to the decision in  Downs Distributing Co

Pty Ltd v. Associated Blue Star Stores Pty Ltd (in liq): (1948) 76 CLR 463.  

Relevant Period and Related Party

14.2.2.It  is  further  submitted  that  the  term  ‘transaction’  under  the  Code

includes an agreement or arrangement in writing for the transfer of assets, or

funds, goods or services from or to the corporate debtor. The use of the word

‘include’  would  signify  its  natural  import  and  is  to  be  given  a  wide

interpretation. It is submitted that as JAL was not only ad idem to the terms of

the transaction but was also the beneficiary thereof, it cannot be said that the

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transaction was only between the corporate debtor and the lenders of JAL;

rather,  the  transaction  was  with  a  ‘related  party’  and  the  look-back  period

would be two years.  

Home buyers – the appellants in C.A. No. 6777-97/2019

14.3. On behalf of the home buyers, who have invested in the projects of the

corporate  debtor  and  whose  interests  would  be  diluted  if  the  impugned

transactions are upheld, the flow of transactions in question has been referred

and essentially, the same contentions have been urged with respect to Section

43 of the Code, with reliance on the decision in Downs Distributing Co (supra),

that  the  impugned  transactions  were  not  made  in  the  ordinary  course  of

business of the corporate debtor JIL; and had been preferential transactions,

putting JAL in a beneficial position at the cost of bona fide creditors of JIL,

including the home buyers.  We are not  re-narrating all  their  contentions to

avoid  repetition.  However,  we  may  observe  that  to  substantiate  their

arguments  with  respect  to  Section  43  of  the  Code,  on  behalf  of  these

appellants,  reliance is also placed on the interim report  of  the  Bankruptcy

Law Reforms Committee (February 2015) and the decision of  this  Court

in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd.:  (2018) 2 SCC

674.

The respondents

15. The contesting respondents  have refuted the contentions of  the

appellants  with  essentially  similar  submissions  that  the  transactions  in

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question cannot be termed as preferential transactions within the meaning of

Section 43 of the Code.  

15.1. The respondents,  particularly  the lenders of  JAL, while maintaining a

consistent stand that the transactions in question are not preferential and do

not  fall  under  Section 43 of  the Code,  have submitted that  they being the

bankers and financial  institutions,  are regularly  engaged in the business of

extending  loans  and  other  facilities  which  form the  backbone  of  economic

growth; and taking of such securities, including third party security, is one of

the normal and ordinary feature of their business and dealings, particularly that

of corporate money lending. According to these respondents, if at all such third

party securities are avoided on the allegation of being preferential, it is likely to

have a devastating effect  on the entire economy because the bankers and

financial institutions would then be left high and dry; and for future dealings,

they shall have no alternative but to restrict their activities only to the direct

party securities which would, in turn, result in retardation and regression. It is

submitted that in a given case, the borrower may not be able to offer matching

security to secure the entire advance requisite for its business and growth; and

legally it  is not impermissible between the related companies that one may

provide  security  towards  the  loan/advance/facility  obtained  by  the  other.

According to the respondents,  the scheme of the Code, and particularly its

Part  II,  has never  been to  allow the processes of  insolvency resolution or

liquidation  to  operate  detrimental  to  the  interests  of  the  financers  like

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themselves (lenders of  JAL).  It  is  contended that  on the true scope of  the

provisions contained under Section 43 of the Code, with reference to the intent

and  object,  the  transactions  in  question,  representing  the  security  and

guarantee  extended  by  the  corporate  debtor  JIL,  cannot  be  construed  as

preferential, particularly when they were entered into in the ordinary course of

business and financial affairs of the corporate debtor as also the transferees.  

15.2. Apart  from  expressing  such  concerns  about  likely  prejudice  to

themselves  and  to  the  economy  if  the  transactions  in  question  are  held

preferential,  a variety  of  contentions have been advanced on behalf  of  the

respondents, while refuting those of the appellants. We may briefly summarize

the leading contentions on behalf of the contesting respondents while omitting

repetitions.   

Axis Bank  

15.3. While maintaining that the impugned transactions cannot be considered

as preferential  within the meaning of  Section 43 of  the Code,  the principal

contentions on behalf of this respondent are as under: -

a. The transactions did not occur within the ‘relevant time’.  

15.3.1. It  is contended that the ‘relevant time’ in the present circumstances

could  be  only  one  year  as  the  transfer  of  property  interest  was  to  this

respondent, which is a Bank and an unrelated party. It is further contended

that, in any event, the land parcels were mortgaged on 24.02.2015, which is

beyond  even  the  two  years  formulation,  the  relevant  time  being  from

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10.08.2015  to  09.08.2017.  The  subsequent  re-execution  of  the  mortgage

deeds on 15.09.2015 and then again on 29.12.2016 cannot be considered to

be a substantive event since the nature and identity of the security remained

the same and no fresh encumbrances were created.  The re-mortgage was

done to reflect the increase in the amount of facilities and number of members

in the consortium. It is not the case that the existing facilities were paid, the

mortgage  satisfied,  and  fresh  facilities  were  created  for  which  a  fresh

mortgage was required.  

b. Without prejudice to the above, the ingredients of Section 43(2) are not met.

15.3.2. It is further submitted that Sections 43/44 of the Code are expropriating

provisions  as  they  affect  concluded transactions  and have the  potential  to

render void the transfers of property done through the transactions which are

otherwise legitimate and hence, such provisions must be strictly construed.

The decisions of this Court in  Devinder Singh & Ors v. State of Punjab &

Ors:  (2008) 1 SCC 728  and  Nareshbhai  v.  Union of India :  (2019) SCC

Online SC 1027 have been relied upon.  

15.3.3.  It is submitted that the requirements set out under Section 43(2) must

be strictly construed and in the instant case, the two prongs under Section

43(2)  have  not  been  satisfied.  With  reference  to  UNCITRAL  Legislative

Guide on Insolvency Law at para 177, it is submitted that as per Section

43(2)(a), a preference could only be given to an existing creditor such that he

is preferred over other creditors but in this matter, the security was provided

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for  the  benefit  of  the  respondent  bank,  which  did  not  have  a  pre-existing

creditor-debtor relationship with the corporate debtor. Further, the security was

provided on account of the debt obligations of JAL, and not any  antecedent

debt obligations of the corporate debtor.  

15.3.4. It is further submitted, without prejudice to the above, that even if JAL

is  taken to  be  a  creditor  within  the  meaning  of  Section  43(2)(a),  then the

requirements of Section 43(2)(b), the second prong of the two-fold requirement

for  a  transaction  to  be  a  preference,  are  not  met.  It  is  submitted  that  the

transfer in the instant case has no effect whatsoever on the relative position of

JAL in the distribution waterfall – it remains an operational creditor without any

security interest.  

c. Without  prejudice  to  the  above,  security  was  provided  in  the  ordinary course of business.

15.3.5. While pointing out that Section 43(3)(a) carves out exception for the

transactions made in the ordinary course of  business or financial  affairs of

either the corporate debtor or the transferee, it is contended that no material

particulars/evidence have been produced to  show that  the provision of  the

security was not in the ordinary course of business of the corporate debtor. On

the contrary, according to the respondent, (i) creation of third party security is

an  established commercial  business  practice;  (ii)  the  corporate  debtor  has

continuously disclosed details of the security in its annual reports beginning

from the financial year ending 31.03.2015 and thus, creation of security was

known to all and disclosed in public documents; and (iii) no evidence of dissent

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from any existing creditor of the corporate debtor has been shown at the time

of  creation  of  the  security.  The  transaction  in  question,  according  to  the

respondent,  had been in  the  ordinary  course  of  business  of  the  corporate

debtor and remains unexceptionable.

15.3.6. It is further contended that the provision of security was also in the

ordinary course of business of the respondent who is a scheduled commercial

bank and is duly authorized by statute to carry out the business of commercial

lending on a secured basis [per Section 6(1)(a) of the Banking Regulation Act,

1949];  and is statutorily  entitled to seek credit  enhancement  on account of

outstanding debts by way of creation of security interests by borrowers or their

related entities. For this reason too, with the transaction being in the ordinary

course of business of the transferee i.e., the respondent, it cannot be termed

as a preferential transaction.

15.3.7. It is yet further submitted that the contention of IRP that the corporate

debtor ought not to have given the security as its accounts had turned NPA

with certain banks is fallacious as it conflates the concepts of ‘NPA’ and ‘willful

defaulter’ and  ignores  that  the  security  was  given to  the  respondent  even

before  the  account  turned  NPA  qua certain  banks.  With  reference  to  the

interim report of the Bankruptcy Law Reforms Committee issued in February

2015, it is submitted that as per the said report, avoidance transactions relate

to ‘willful  defaulters’ and not ‘NPAs’.  It  is  further argued that the distinctive

position of a willful defaulter and an NPA is also indicated in Section 29A of

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Code, where Section 29A(b) provides that a willful defaulter can never be a

resolution applicant whereas, Section 29A(c) provides that a company whose

account has become non-performing may only be disqualified if the account

has remained non-performing for a period of one year. It is submitted that RBI

Master Circular on asset classification issued in July 2015 and June 2019 set

out that an account may turn NPA qua a particular bank if the debts are not

being serviced regularly but this does not mean that a particular company’s

accounts  would  have  turned  non-performing  qua all its  lenders.  It  is  also

submitted  that  the  other  account  of  corporate  debtor  with  this  respondent

turned NPA only in 2017, i.e., much after the creation of security in question. It

is further contended that a company’s account may easily become standard if,

inter alia, the company regularizes its payment timelines or if lenders decide to

revise  the  company’s  repayment  obligations.  Reliance  is  placed  on  the

decisions of this Court in Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v.

Union of India & Ors: (2015) 4 SCC 770  and  State Bank of India v. Jah

Developers Pvt. Ltd. & Ors.: (2019) 6 SCC 787.

d. Section 44 does not come into operation unless a transaction is made out to be preferential under Section 43.

15.3.8. It is further submitted that the jurisdictional condition of exercising

power under Section 44 is the finding that a transaction is preferential under

Section 43, as is evident from the heading of Section 44 i.e., ‘Orders in cases

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of  preferential  transactions’;  and,  for  the  transaction  in  question  being  not

preferential under Section 43, no orders could be made under Section 44.  

Standard Chartered Bank

15.4. Most  of  the  contentions  urged  on  behalf  of  this  respondent  are

analogous  to  the  contentions  noticed  in  the  preceding  paragraphs  and,

therefore, we are not repeating the same. It is maintained on behalf of this

respondent that in whatever way the relevant time is reckoned for the purpose

of Section 43 of the Code, its transactions would not fall therein because the

initial mortgage in favour of this respondent was made in the year 2012, which

is  beyond  the  two  years  formulation.  The  further  submission  is  that  the

subsequent conversion of registered mortgage into an equitable mortgage on

04.11.2015  and  thereafter,  re-conversion  from  equitable  mortgage  to

registered mortgage on 24.05.2016, in relation to the same subject property as

a security, cannot be considered as a fresh creation of mortgage and hence,

the transaction in question does not fall within relevant time.  

ICICI Bank  

15.5. Again, for most of the contentions on behalf of this respondent being

similar in nature, we are not repeating the same. However, we may notice that

with reference to Section 43(4) of the Code, it has been contended that since

this respondent bank is an unrelated party to both the corporate debtor and

JAL, the relevant look-back period would be one year and not two years. It is

submitted  that  the  mortgages  were  created  on  15.09.2015  and  the  same

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property was re-mortgaged on 29.12.2016, which is much before the look-back

period of one year and thereby, this transaction could not be challenged as

being  preferential.  The  decisions  of  the  Bombay  High  Court  in  Monarch

Enterprises v. Kishan Tulpule & Ors : (1992) 74 Comp Case 89 (Bom) and

that of Madras High Court in  IDBI Bank Ltd. v. The Administrator, Kothari

Orient  Finance Ltd.,  the Official  Liquidator  & S.  Ramaiah : (2009)  152

Comp Case  282  (Mad) have  been  referred  while  submitting  that  a  mere

transfer  of  the  assets  within  the  look-back  period  would  not  make  the

transaction preferential except when it is coupled with the intent to prefer one

creditor over the other.  Further, for contending that the impugned transactions

were made in the ordinary course of business of both the respondent Bank

and the corporate debtor,  the Annual Reports of  corporate debtor JIL have

been  referred  with  the  submissions  that  the  mortgaged  properties  were

disclosed as ‘inventories’ for the corporate debtor being a real estate company;

and  hence,  dealing  with  the  ‘inventories’/‘stock-in-trade’  is  in  the  ordinary

course of business.  

15.5.1. It is further submitted that there is no relation between the financial

position  of  the  corporate  debtor  and  the  impugned  transaction  for  another

reason that as on the date of commencement of insolvency proceedings, the

corporate  debtor  had 740 acres  of  unencumbered  land,  which  could  have

been  used  to  create  security  for  the  creditors  of  corporate  debtor.  While

pointing out that 11 out of 13 lenders of the corporate debtor JIL are also a

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part of the consortium of JAL lenders whose loans were secured by mortgages

made by the corporate debtor, it is submitted that prior to 15.09.2015, when

the  questioned  Consortium  of  Mortgages  was  created,  only  Jammu  and

Kashmir Bank had declared the corporate debtor as NPA, which was followed

by the other lenders declaring the corporate debtor as NPA. It is contended

that prior to the said declaration, the transactions with this respondent had

been made as also the mortgages created on 15.09.2015,  which had also

secured  the  interests  of  Jammu  and  Kashmir  Bank  and,  therefore,  the

impugned transactions could not be said to be preferential.  

Other respondent-lenders

15.6. Broadly speaking, similar submissions as noted above have been made

on behalf  of  other respondent-lenders  while  maintaining that  the impugned

transactions are covered by the exclusion clause under Section 43 inasmuch

as the transfers had been made in the ordinary course of  business of  the

corporate debtor as also the transferees; and that for the purpose of Section

43 of the Code, the relationship between the respondent-lenders and JIL ought

to be looked into rather than assuming JAL to be the primary transferee. It has

also been argued, while relying on the decision of this Court in  Purbanchal

Cables & Conductors Pvt. Ltd. & Ors v. Assam State Electricity Board &

Ors : (2012) 7 SCC 462, that the provisions of Section 43 of the Code, by their

very  nature,  would  come  into  operation  at  least  one  year  after  the

enactment of the Code i.e., it would have only the prospective effect and

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cannot be given retrospective effect so as to operate over any period

prior to the enactment.

Jaiprakash Associates Ltd. (JAL)  

15.7. As noticed, this respondent JAL is the holding company of  corporate

debtor  JIL;  and  the  transactions  in  question  had  been  for  securing  the

loans/facilities obtained by this respondent. Even while broadly adopting the

contentions advanced by other respondents, further submissions have been

made  on  behalf  of  this  respondent  to  assert  on  the  credence  of  the

transactions  in  question.  With  reference  to  its  relationship  with  JIL,  it  is

contended on behalf of this respondent that being the holding company, JAL

had been providing financial, technical and strategic support to JIL in various

ways being: (i) Investment made in 99,50,00,000 shares of JIL (paid up value

Rs.  995  crores)  at  its  very  nascent  stage,  which  means  contribution  of

substantial  funds  for  the  business  of  JIL without  interest;  (ii)  Pledge of  its

70,83,56,087  equity  shares  held  in  JIL in  favour  of  the  lender  of  JIL;  (iii)

Promoter  Support  Agreement  to  meet  the  Debt  Service  Reserve  Account

(DSRA) obligation of JIL towards its lenders; and (iv) Bank Guarantees of Rs.

212 crores in aggregate to meet the DSRA obligation of JIL for the financial

assistance obtained by JIL. It is submitted that such dealings/transactions by

JAL in favour of JIL depict the nature of business relationship between JAL

and JIL and makes it amply clear that the impugned transactions were done in

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the  ordinary  course  of  business  and  financial  affairs  of  JIL.  It  is  further

submitted that the mortgage of 858 acres of land made in favour of lenders of

JAL fall within the ambit of Section 186 of Companies Act, 201325 and is not

unauthorized.

15.7.1. It is contended that avoidance of preferential transactions applies to a

case where  the  company’s  accounts  has  become stressed and there  is  a

strong likelihood of  it  going into  liquidation but  in  the present  case,  it  is  a

matter of record that the accounts of JIL had been categorised as NPA only to

an extent  of  29.04% whereas the remaining accounts  were still  ‘standard’.

According to  the respondent  JAL,  this  fact  was specifically  pleaded at  the

stage of  opposing the application filed before the NCLT for  initiating CIRP

against JIL but JIL gave its consent for CIRP on the bona fide belief that it

would be able to restructure its loans and get back the management of JIL.

The submission is that, in the given economic scenario, JIL was not in any

such  stress  or  problem that  it  could  not  have  continued  with  the  existing

mortgages for securing the facilities advanced to JAL by the lender banks and

financial institutions.

Insolvency and Bankruptcy Code, 2016: historical background, objects,  scheme and structure of the relevant parts

16. The basic issue raised in the matter being related with the effect and

operation of Section 43 of the Code, concerning ‘Preferential transactions

25 Hereinafter also referred to as ‘the Act of 2013’.

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and  relevant  time’, appropriate  it  shall  be  to  comprehend  the  principles

underlying  the  concept  of  ‘preferential  transactions’.  A little  insight  into  the

objects sought to be achieved by the Insolvency and Bankruptcy Code, 2016

and its historical background shall be apposite.

16.1. As noticed from Preamble, the Code came to be enacted to consolidate

and amend the laws relating to reorganisation and insolvency resolution of

corporate  persons  and even of  partnership  firms  and individuals  in  a  time

bound manner; the objectives,  inter alia,  being for maximisation of value of

assets of such persons and balance of interest of all the stakeholders.

16.1.1. In the case of Swiss Ribbons Private Limited and Anr. v. Union of

India and Ors.: (2019) 4 SCC 1726, this Court had the occasion to traverse

through the historical  background and scheme of  the Code in the wake of

challenge to the constitutional validity of various provisions therein. One part of

such  challenge  had  also  been  founded  on  the  ground  that  classification

between ‘financial creditor’ and ‘operational creditor’ was discriminatory and

violative of Article 14 of the Constitution of India.27  This ground as also several

other grounds pertaining to various provisions of the Code were rejected by

this Court after elaborate dilation on the vast variety of rival contentions and

the provisions so contained in the Code were upheld as valid. In the course of

26 Hereinafter also referred to as the case of ‘Swiss Ribbons’. 27 The law declared by this Court in this case of Swiss Ribbons, while rejecting the contentions that the classification between ‘financial creditor’ and ‘operational creditor’ was discriminatory and violative of Article 14, shall have some bearing on the issues at hand, particularly in relation to the second issue on the claim of the respondent-lenders for being treated a financial creditors of JIL, as shall be noticed hereafter later.  

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such distillation, this Court took note, inter alia, of the pre-existing state of law

as also the objects and reasons for enactment of the Code. While observing

that  the  focus  of  the  Code  was  to  ensure  revival  and  continuation  of  the

corporate debtor, where liquidation is to be availed of only as a last resort, this

Court  pointed  out  that  on  its  scheme  and  frame  work,  the  Code  was  a

beneficial legislation to put the corporate debtor on its feet, and not a mere

recovery legislation for the creditors. This Court said,-

“27. As is discernible, the Preamble gives an insight into what is sought  to  be  achieved  by  the  Code.  The  Code  is  first  and foremost, a Code for reorganisation and insolvency resolution of corporate  debtors.  Unless  such  reorganisation  is  effected  in  a time-bound manner, the value of the assets of such persons will deplete. Therefore,  maximisation of value of  the assets of  such persons  so  that  they  are  efficiently  run  as  going  concerns  is another very important objective of  the Code. This,  in turn,  will promote entrepreneurship as the persons in management of the corporate  debtor  are  removed  and  replaced  by  entrepreneurs. When,  therefore,  a  resolution  plan  takes  off  and the  corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor  itself  becomes a beneficiary  of  the resolution scheme— workers are paid, the creditors in the long run will be repaid in full, and shareholders/investors are able to maximise their investment. Timely resolution of a corporate debtor who is in the red, by an effective  legal  framework,  would  go  a  long way  to  support  the development  of  credit  markets.  Since  more  investment  can  be made with funds that have come back into the economy, business then eases up, which leads, overall,  to higher economic growth and development of  the Indian economy.  What is interesting to note  is  that  the  Preamble  does  not,  in  any  manner,  refer  to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business  

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of the corporate debtor as a going concern. (See ArcelorMittal28 at para 83, fn 3)

28. It can thus be seen that the primary focus of the legislation is to  ensure  revival  and  continuation  of  the  corporate  debtor  by protecting  the  corporate  debtor  from its  own  management  and from  a  corporate  death  by  liquidation.  The  Code  is  thus  a beneficial legislation which puts the corporate debtor back on its feet,  not  being  a  mere  recovery  legislation  for  creditors.  The interests of the corporate debtor have, therefore, been bifurcated and  separated  from  that  of  its  promoters/those  who  are  in management.  Thus, the resolution process is not adversarial  to the corporate debtor but,  in fact,  protective of  its interests.  The moratorium  imposed  by  Section  14  is  in  the  interest  of  the corporate  debtor  itself,  thereby  preserving  the  assets  of  the corporate  debtor  during  the  resolution  process.  The  timelines within which the resolution process is to take place again protects the  corporate  debtor’s  assets  from  further  dilution,  and  also protects all its creditors and workers by seeing that the resolution process  goes  through  as  fast  as  possible  so  that  another management  can,  through  its  entrepreneurial  skills,  resuscitate the corporate debtor to achieve all these ends.”

16.2. Keeping in view the objectives, discernible from the Preamble as also

from the Statement of Objects and Reasons of the Code and the observations

of this Court, we may now take an overview of the scheme and structure of the

relevant parts of the Code. Part I  thereof contains the provisions regarding

title,  extent,  commencement  and  application  of  the  Code  as  also  defines

various expressions used and employed in the Code. Different provisions have

come into force on different dates, as permissible under proviso to sub-section

(3)  of  Section  1.  Part  II  of  the  Code  deals  with  insolvency  resolution  and

liquidation for corporate persons. Chapter I of Part II makes provision for its

applicability and also defines various expressions used in this Part (Sections 4

28 ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta & Ors: (2019) 2 SCC 1

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and 5). Chapter II of Part II contains the provisions for corporate insolvency

resolution  process  in  Sections  6  to  32  whereas  Chapter  III  of  this  Part  II

contains the provisions for liquidation process in Sections 33 to 5429.  

16.3.  Though the provisions relating to ‘preferential transactions and relevant

time’ (in Section 43 of  the Code) occur in Chapter III  of  Part  II,  relating to

liquidation  process,  but  such  provisions  being  for  avoidance  of  certain

transactions and having bearing on the resolution process too, by their very

nature, equally operate over the corporate insolvency resolution process, and

hence, the resolution professional is obligated, by virtue of clause (j) of sub-

section (2) of Section 25 of the Code, to file application for avoidance of the

stated transactions in accordance with Chapter III.  That  being the position,

Section 43 of the Code comes into full effect in CIRP too.  

Preferential transaction at a relevant time: concept and connotations

17. Having regard to the questions involved, a brief insight into the theory

relating to avoidance of  certain transactions as being preferential  would be

pertinent at this stage.

17.1.The basic concept of ‘preference’ as per the law dictionaries and lexicons

is the act of ‘paying or securing to one or more of his creditors, by an insolvent

debtor, the whole or part of their claims, to the exclusion of the rest’.30 We may

29 Sections 4 to 33 came into force on 01.12.2016 whereas Section 33 to 54 came into force on 15.12.2016. 30 P. Ramanatha Aiyar’s Advanced Law Lexicon (5th Ed.-Vol 3, p.4002)

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usefully  take  note  of  the  meaning,  definition  and  basic  ingredients  of

‘preference’ and ‘preferential transfer’, as defined in Black’s Law Dictionary31:

“preference.  (15c) 1. The favouring of one person or thing over another. 2. The person or thing so favoured. 3. The quality, state, or condition of treating some persons or things more advantageously than others. 4. Priority of payment given to one or more creditors by a debtor; a creditor’s right to receive such priority. 5. Bankruptcy. PREFERENTIAL TRANSFER.

 insider  preference. (1981)  A  transfer  of  property  by  a bankruptcy debtor to an insider more than 90 days before but within one year after the filing of the bankruptcy petition.

 liquidation preference. (1936) A preferred shareholder’s right, once the corporation is liquidated, to receive a specified distribution before common shareholders receive anything.

 voidable preference . See PREFERENTIAL TRANSFER”

*** *** *** “preferential  transfer.  (1874)  Bankruptcy.  A  prebankruptcy transfer  made  by  an  insolvent  debtor  to  or  for  the  benefit  of  a creditor,  thereby  allowing  the  creditor  to  receive  more  than  its proportionate  share  of  the  debtor’s  assets;  specif.,  an  insolvent debtor’s transfer of a property interest for the benefit of a creditor who is owed on an earlier debt, when the transfer occurs no more than 90 days before the date when the bankruptcy petition is filed or (if the creditor is an insider) within one year of the filing, so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate.

Under  the  circumstances  described  in  11  USCA  §547,  the bankruptcy  trustee  may,  for  the  estate’s  benefit,  recover  a preferential transfer from the transferee. – Also termed preference; voidable  preference;  voidable  transfer;  preferential  assignment; preferential debt payment….”  

17.2. It could be readily noticed that as far back as from 15th century, the

concept of ‘preference’ has been taken note of and the principles relating to

avoidance of  certain  preferences  have evolved,  particularly  in  the fields  of

31 10th Edition – pp. 1369 and 1370

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mercantile laws and more particularly in the laws governing insolvency and

bankruptcy32;  and definitively  from 1874,  various jurisdictions have defined,

described and dealt with ‘preferential transfer’ as being the transaction where

an insolvent debtor makes transfer to or for the benefit of a creditor so that

such  beneficiary  would  receive  more  than  what  it  would  have  otherwise

received  through  the  distribution  of  bankruptcy  estate.  Section  547  of  US

Bankruptcy Code provides for the circumstances in which a bankruptcy trustee

may, for the benefit of the estate in question, recover a preferential transfer

from the transferee. Section 239 of the UK Insolvency Act, 1986 also provides

for the same measures for avoidance of preference given to any person at the

relevant time. The time factor also plays a crucial role in such measures of

avoidance.  This  ‘relevant  time’ for  the purpose of  avoidance of  preferential

transactions  is  now  commonly  referred  to  as  the  ‘look-back’  period.

Significantly, when the preferential transaction is with an unconnected party,

the look-back period is comparatively lesser than that of the transaction with a

connected party, who is referred to as ‘insider’ or ‘related party’33.  

32 It may in the passing be observed that ‘an insolvency’ essentially refers to financial distress, i.e., financial state in which a person or entity is unable to pay its dues or meet with other akin obligations. Insolvency may be temporary in character. ‘A bankruptcy’, on the other hand, essentially refers to the legal process to regulate as to how an insolvent entity shall pay off his dues.  

As noticed, the primary focus of IBC is ‘to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation’. In other words, insolvency resolution is the main object; and liquidation with bankruptcy is the last resort.

33 We may also indicate that any attempt by an insolvent, of alienating or encumbering the assets in favour of one person so as to cause harm to the interest of a bona fide creditor had been sternly dealt with  by  the  legislature  even  in  relation  to  the  individuals, as  could  be  readily  noticed  from the provisions   contained   in   the   erstwhile  Presidency - Towns  Insolvency  Act,  1909  and  Provincial  

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17.3. Coming now to the corporate personalities, it is elementary that by

the  very  nature  and  legal  implications  of  incorporation,  ordinarily,  several

individuals and entities are involved in the affairs of a corporate person; and

impact of the activities of a corporate person reaches far and wide, with the

creditors  being  one  of  the  important  set  of  stakeholders.  If  the  corporate

person  is  in  crisis,  where  either  insolvency  resolution  is  to  take  place  or

liquidation is  imminent;  and the transactions by such corporate person are

under scanner, any such transaction, which has an adverse bearing on the

financial health of the distressed corporate person or turns the scales in favour

Insolvency Act, 1920. These enactments stand repealed by IBC but the relevant provisions therein give an insight into the concepts. Section 56 of the Act of 1909 provided thus:  

“56.Avoidance of preference in certain cases. - (1) Every transfer of property, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they became due from his own money in favour of any creditor, with a view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void as against the official assignee.

(2) This section shall not affect the rights of any person making title in good faith and for valuable consideration through or under a creditor of the insolvent.”   

The relevant part of Section 69 of the Act of 1920 had been as under:

“69. Offences by debtors. – If a debtor, whether before or after the making of an order of adjudication, -  

*** *** *** (c) fraudulently with intent to diminish the sum to be divided among his creditors

or to give an undue preference to any of his creditors, -  (i) has discharged or concealed any debt due to or from him, or (ii)  has  made away with,  charged,  mortgaged or  concealed any  part  of  his property of any kind whatsoever, he shall be punishable on conviction with imprisonment which may extend to

one year.”

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of  one  or  a  few  of  its  creditors  or  third  parties,  at  the  cost  of  the  other

stakeholders, has always been viewed with considerable disfavour34.  

17.4. Noteworthy distinctive features, in the scheme of the Companies Act,

2013 and Insolvency and Bankruptcy Code, 2016, as regards preferences in

relation to the corporate personalities, are that while Section 328 of the Act of

2013 deals  with  fraudulent  preference  and Section  329 thereof  deals  with

transfers  not  in  good  faith  but,  on  the  other  hand,  in  the  Code,  separate

provisions are made as regards the transactions intended at defrauding the

creditors (Section 49 IBC) as also for fraudulent trading or wrongful trading

(Section  66  IBC).  The  provisions  contained  in  Section  43  of  the  Code,

however,  indicate  the  intention  of  legislature  that  when  a  transaction  falls

within  the coordinates defined therein,  the same shall  be deemed to be a

preference given at a relevant time and shall not be countenanced. Therefore,

intent may not be of a defence or support of any preferential transaction that

falls within the ambit of Section 43 of the Code.  

34 In relation to the corporate personalities, the concept of ‘fraudulent preference’, earlier embodied in Section 531 of the Companies Act, 1956 now occurs in its modified form in Sections 328 and 329 of the  Companies  Act,  2013.  Tersely  put,  fraudulent  preference  means  parting  with  assets  of  the corporate person in favour of one or a few of its creditors, which has the effect of defeating the claim of other creditors.  Per Section 329 of the Act of 2013, any transfer of property by a company, other than that in the ordinary course of business, if made within a period of one year before presentation of a petition for winding up by the Tribunal and not in good faith and for valuable consideration, is regarded as void against the liquidator. Per Section 328 of the Act of 2013,  if a company has given preference to one of  its creditors  or a surety  or  a guarantor  for  any of  the debts or  other  liabilities and the company does or suffers anything which has the effect of putting that person in a better position in the event  of  company  going  into  liquidation  than  the  position  he  would  have  been  in  but  for  such preference prior to six months of making winding up application, the Tribunal, on being satisfied that the transaction was of a fraudulent preference, may order for restoring the position to what it would have been if the preference had not been given.  More particularly, as regards transfer of property, it is provided in sub-section (2) of Section 328 that if the transaction is made six months before winding up application, the Tribunal may declare such transaction invalid and restore the position.  

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17.5. At this juncture, we may usefully refer to paragraph 177 of UNCITRAL

Legislative Guide on Insolvency Law, as referred to and relied upon by learned

counsel  for  the  respondent  as  also  paragraphs  178  and  179  thereof,  to

indicate  the  basic  theory  and  principles  governing  the  provisions  under

consideration. In the said Guide, while dealing with the topic of treatment of

assets on commencement of insolvency proceedings, it is stated broadly on

the theory of avoidance of preferential transactions as follows:

“(c) Preferential transactions  (i) Criteria  177. Preferential transactions may be subject to avoidance where: (a) the transaction took place within the specified suspect period; (b) the transaction involved a transfer to a creditor on account of a pre-existing  debt;  and  (c) as  a  result  of  the  transaction,  the creditor received a larger percentage of its claim from the debtor’s assets than other creditors of  the same rank or  class (in  other words, a preference). Many insolvency laws also require that the debtor was insolvent or close to insolvent when the transaction took  place  and  some  further  require  that  the  debtor  have  an intention to create a preference. The rationale for including these types of transaction within the scope of avoidance provisions is that,  when  they  occur  very  close  to  the  commencement  of proceedings,  a  state  of  insolvency  is  likely  to  exist  and  they breach  the  key  objective  of  equitable  treatment  of  similarly situated creditors by giving one member of a class more than they would otherwise legally be entitled to receive.  178. Examples of preferential transactions may include payment or set-off of debts not yet due; performance of acts that the debtor was under no obligation to perform; granting of a security interest to secure existing unsecured debts; unusual methods of payment, for example, other than in money, of debts that are due; payment of a debt of considerable size in comparison to the assets of the debtor;  and,  in  some  circumstances,  payment  of  debts  in response to extreme pressure from a creditor, such as litigation or attachment, where that pressure has a doubtful basis. A set-off, while not avoidable as such, may be considered prejudicial when it occurs within a short period of time before the application for

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commencement of the insolvency proceedings and has the effect of altering the balance of the debt between the parties in such a way as to  create a  preference or  where  it  involves  transfer  or assignment of claims between creditors to build up set-offs. A set- off may also be subject to avoidance where it occurs in irregular circumstances, such as where there is no contract between the parties to the set-off.  

(ii) Defences  

179.  One  defence  to  an  allegation  that  a  transaction  was preferential  may  be  to  show  that,  although  containing  the elements of a preference, the transaction was in fact consistent with  normal  commercial  practice  and,  in  particular,  with  the ordinary  course  of  business  between  the  parties  to  the transaction. For example, a payment made on receipt of goods that are regularly delivered and paid for may not be preferential, even if made within proximity to the commencement of insolvency proceedings. This approach encourages suppliers of goods and services to continue to do business with a debtor  that  may be having  financial  problems,  but  which  is  still  potentially  viable. Other defences available under insolvency laws include that the counterparty  extended credit  to  the debtor  after  the transaction and that credit has not been paid (the defence is limited to the amount of the new credit); that the counterparty gave new value for which it was not granted a security interest; the counterparty can show that it did not know a preference would be created; that the counterparty did not know or could not have known that the debtor  was insolvent  at  the time of  the transaction;  or  that  the debtor’s  assets  exceeded  its  liabilities  at  the  time  of  the transaction.  Some  of  these  latter  defences,  in  particular  those involving the intent of the parties to the transaction, suffer from the disadvantage of being difficult to prove and may make avoidance proceedings complex, unpredictable and lengthy.”

Analysing Section 43 of the Code

18.  In the backdrop of the foregoing, we may now scrutinise Sections 43

and  44  of  the  Code.  Section  44  provides  for  the  consequences  of  an

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offending35 preferential  transaction  i.e.,  when  the  preference  is  given  at  a

relevant  time.  Under Section 44,  the Adjudicating Authority  may pass such

orders  as  to  reverse  the  effect  of  an  offending  preferential  transaction.

Amongst  others,  the  Adjudicating  Authority  may  require  any  property

transferred  in  connection  with  giving  of  preference  to  be  vested  in  the

corporate  debtor;  it  may  also  release  or  discharge  (wholly  or  in  part)  any

security  interest  created  by  the  corporate  debtor.  The  consequences  of

offending preferential transaction are, obviously, drastic and practically operate

towards  annulling  the  effect  of  such  transaction.  Looking  to  the  contents,

context and consequences, we are at one with the contentions urged on behalf

of the respondents with reference to the decisions in  Devinder Singh (supra)

and other  cited cases,  that  these provisions  need to  be  strictly  construed.

However, even if we proceed on strict construction of Section 43 of the Code,

the underlying principles and the object cannot be lost sight of. In other words,

the construction has to be such that leads towards achieving the object  of

these provisions.

18.1. Looking at the broad features of Section 43 of the Code, it is noticed that

as  per  sub-section  (1)  thereof,  when  the  liquidator  or  the  resolution

professional, as the case may be, is of the opinion that the corporate debtor

has, at a relevant time, given a preference in such transactions and in such

manner as specified in sub-section (2), to any person/persons as referred to in

35 Note: Here the expression ‘offending’ is only to denote the unacceptability of such transaction and not any criminality.  

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sub-section  (4),  he  is  required  to  apply  to  the  Adjudicating  Authority  for

avoidance  of  preferential  transactions  and  for  one  or  more  of  the  orders

referred  to  in  Section  44.  If  twin  conditions  specified  in  sub-section  (2)  of

Section 43 are satisfied, the transaction would be deemed to be of preference.

As per clause (a) of sub-section (2) of Section 43, the transaction, of transfer

of property or an interest thereof of the corporate debtor, ought to be for the

benefit36 of  a  creditor  or  a  surety  or  a  guarantor  for  or  on  account  of  an

antecedent financial debt or operational debt or other liabilities owed by the

corporate debtor; and as per clause (b) thereof, such transfer ought to be of

the effect of putting such creditor or surety or guarantor in beneficial position

than it would have been in the event of distribution of assets under Section

53.37  

18.2. However, merely giving of the preference and putting the beneficiary in a

better position is not enough.  For a preference to become an offending one

for the purpose of Section 43 of the Code, another essential and rather prime

requirement is to be satisfied that such event, of giving preference, ought to

have happened within and during the specified time, referred to as “relevant

time”. The relevant time is reckoned, as per sub-section (4) of Section 43 of

the Code, in two ways: (a) if the preference is given to a related party (other

than an  employee),  the  relevant  time  is  a period of two years preceding the

36 It may be intended benefit or may even be unintended benefit 37 Section 53 IBC makes provision for distribution of the proceeds from sale of the liquidation assets, in case of liquidation of the corporate debtor.

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insolvency commencement date; and (b) if the preference is given to a person

other than a related party, the relevant time is a period of one year preceding

such commencement date. In other words, for a transaction to fall within the

mischief sought to be remedied by Sections 43 and 44 of the Code, it ought to

be  a  preferential  one  answering  to  the  requirements  of  sub-section  (2)  of

Section 43; and the preference ought to have been given at a relevant time, as

specified in sub-section (4) of Section 43.  

18.3. However,  even if  a  transaction  of  transfer  otherwise  answers  to  and

comes within the scope of sub-sections (4) and (2) of Section 43 of the Code,

it may yet remain outside the ambit of sub-section (2) because of the exclusion

provided in sub-section (3) of Section 43.

18.4. Sub-section (3) of Section 43 specifically excludes some of the transfers

from the ambit of sub-section (2). Such exclusion is provided to: (a) a transfer

made in the ordinary course of business or financial affairs of the corporate

debtor  or transferee38;  (b)  a transfer creating security interest  in a property

acquired  by  the  corporate  debtor  to  the  extent  that  such  security  interest

secures new value and was given at the time specified in sub-clause (i)  of

clause (b) of Section 43(3) and subject to fulfilment of other requirements of

sub-clause (ii) thereof. The meaning of the expression “new value” has also

been explained in this provision.  

38 Whether  the  expression “or”,  as occurring in  between the expressions  ‘corporate  debtor’ and ‘transferee’ in clause (a) of sub-section (3) of Section 43, is to be read as “and” has been one of the significant questions raised in this matter and shall be dealt with hereafter later.

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Indicting parts – deemed preference at a relevant time

19. In order to understand and imbibe the provisions concerning preference

at a relevant time, it is necessary to notice that as per the charging parts of

Section  43  of  the  Code  i.e.,  sub-sections  (4)  and (2)  thereof,  a  corporate

debtor shall be deemed to have given preference at a relevant time if the twin

requirements  of  clauses  (a)  and  (b)  of  sub-section  (2)  coupled  with  the

applicable requirements of either clause (a) or clause (b) of sub-section (4), as

the case may be, are satisfied.  

19.1. To put it more explicit, the sum total of sub-sections (2) and (4) is that a

corporate debtor shall  be deemed to have given a preference at a relevant

time if: (i) the transaction is of transfer of property or the interest thereof of the

corporate debtor, for the benefit of a creditor or surety or guarantor for or on

account of an antecedent financial debt or operational debt or other liability; (ii)

such transfer has the effect of putting such creditor or surety or guarantor in a

beneficial position than it would have been in the event of distribution of assets

in accordance with Section 53; and (iii) preference is given, either during the

period of two years preceding the insolvency commencement date when the

beneficiary is a related party (other than an employee), or during the period of

one year preceding the insolvency commencement date when the beneficiary

is an unrelated party.   

19.2. By way of these statutory provisions, legal fictions are created whereby

preference is deemed to have been given; and is deemed to have been given

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at a relevant time, if the stated requirements are satisfied. Variegated features

of  a  deeming provision have been discussed by this  Court  in  the case of

Pioneer Urban (supra) with reference to several of the past decisions, albeit in

the context of such deeming expression occurring in the Explanation added to

sub-clause (f) of Section 5(8) of the Code39. We may usefully extract some of

the relevant passages from the said decision in Pioneer Urban as follows:

19.2.1. As regards construction of a deeming fiction, this Court pointed out the

basic and settled principles in the following:

“88. In every case in which a deeming fiction is to be construed, the observations of Lord Asquith in a concurring judgment in  East End Dwellings Co. Ltd.  v. Finsbury Borough Council: 1952 AC 109 (HL) are cited. These observations read as follows: (AC pp. 132-133)

“If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs  had in fact  existed,  must  inevitably  have flowed from or accompanied  it....  The  statute  says  that  you  must  imagine  a certain state of affairs. It does not say that, having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.”

These observations have been followed time out of number by the decisions of this Court. (See, for example, M. Venugopal v. Divisional Manager, LIC: (1994) 2 SCC 323 at page 329).

*** *** ***

94. Although a deeming provision is to deem what is not there in reality, thereby requiring the subject-matter to be treated as if it were  

39 Such discussion in  Pioneer Urban essentially  led to  this Court  holding that  the said  deeming provision was clarificatory of the true legal position as it already obtained; and was to put beyond the pale of doubt the fact that allottees are to be regarded as financial creditors within the meaning of the enacting part contained in Section 5(8)(f) of the Code. The crucial aspects relating to Section 5(8) of the Code shall  be dilated  hereafter  during the  discussion on the second issue involved  in  these matters.

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real,  yet  several  authorities  and  judgments  show that  a  deeming fiction can also be used to put beyond doubt a particular construction that might otherwise be uncertain. Thus, Stroud's Judicial Dictionary of  Words  and  Phrases (7th Edition,  2008),  defines  "deemed"  as follows:

"Deemed"- as used in statutory definitions "to extend the denotation of the defined term to things it would not in ordinary parlance denote”,  is  often a convenient  device for  reducing the verbiage or an enactment, but that does not mean that wherever it is used it has that effect; to deem means simply to judge or reach a  conclusion  about  something,  and  the  words  “deem”  and “deemed” when used in a statute thus simply state the effect or meaning which some matter or things has-the way in which it is to be  adjudged;  this  need  not  import  artificiality  or  fiction;  it  may simply be the statement of an indisputable conclusion."

19.2.2.  In  Pioneer  Urban,  this  Court  further  extracted  extensively  from the

decision in  Hindustan Cooperative Housing Building Society Limited v.

Registrar, Cooperative Societies and Anr.: (2009) 14 SCC 302 on various

features of  the processes of  construction of  different deeming provisions in

different contexts. Some of the relevant parts of such extraction (as occurring

in paragraph 95 of Pioneer Urban) read as follows (in SCC at pp. 524):

“  ‘…  The  word  “deemed”  is  used  a  great  deal  in  modern legislation.  Sometimes it  is  used to impose for  the purposes of  a statute an artificial construction of a word or phrase that would not otherwise  prevail.  Sometimes  it  is  used  to  put  beyond  doubt  a particular construction that might otherwise be uncertain. Sometimes it is used to give a comprehensive description that includes what is obvious,  what  is  uncertain  and  what  is,  in  the  ordinary  sense, impossible.’

(Per  Lord  Radcliffe  in  St.  Aubyn v.  Attorney  General:1952 AC 15 (HL), AC p. 53)

14. ‘Deemed’, as used in statutory definitions [is meant]

‘to extend the denotation of the defined term to things it would not in ordinary parlance denote, is often a convenient devise for reducing

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the verbiage of an enactment, but that does not mean that wherever it is used it has that effect; to deem means simply to judge or reach a conclusion about something, and the words “deem” and “deemed” when used in a statute thus simply state the effect or meaning which some matter or thing has — the way in which it is to be adjudged; this  need  not  import  artificiality  or  fiction;  it  may  simply  be  the statement of an undisputable conclusion.’

(Per Windener, J. in Hunter Douglas Australia Pty. v.  Perma Blinds: (1970) 44 Aust LJ R 257)

15. When a thing is to be “deemed” something else, it is to be treated as that something else with the attendant consequences, but it is not that something else (per Cave, J., in  R. v.  Norfolk County Court: (1891) 60 LJ QB 379).

‘When  a  statute  gives  a  definition  and  then  adds  that  certain things shall be “deemed” to be covered by the definition, it matters not whether without that addition the definition would have covered them or not.’ (Per Lord President Cooper in Ferguson v.  McMillan : 1954 SLT 109 (Scot))

16.  Whether  the  word  “deemed”  when  used  in  a  statute established a conclusive or a rebuttable presumption depended upon the  context  (see  St.  Leon  Village  Consolidated  School  District v. Ronceray: (1960) 23 DLR (2d) 32 (Can)).

‘…. I … regard its primary function as to bring in something which would otherwise be excluded.’

(Per Viscount Simonds in Barclays Bank Ltd. v. IRC: 1961 AC 509 at AC p. 523.)

‘ “Deems” means “is of opinion” or “considers” or “decides” and there is  no implication of  steps to  be taken before the opinion is formed or the decision is taken.’

[See R. v. Brixton Prison (Governor), ex p Soblen: (1963) 2 QB 243 at QB p. 315.]’”

19.3. On a conspectus of the principles so enunciated, it is clear that although

the word ‘deemed’ is employed for different purposes in different contexts but

one of its principal purpose, in essence, is to deem what may or may not be in

reality, thereby requiring the subject-matter to be treated as if real. Applying

the principles to the provision at hand i.e., Section 43 of the Code, it could

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reasonably be concluded that any transaction that answers to the descriptions

contained  in  sub-sections  (4)  and  (2)  is  presumed  to  be  a  preferential

transaction at a relevant time, even though it may not be so in reality. In other

words, since sub-sections (4) and (2) are deeming provisions, upon existence

of the ingredients stated therein, the legal fiction would come into play; and

such transaction entered into by a corporate debtor  would be regarded as

preferential transaction with the attendant consequences as per Section 44 of

the Code, irrespective whether the transaction was in fact intended or even

anticipated to be so.  

Exclusion part

19.4. Even when the above-stated indicting parts of Section 43 as occurring in

sub-sections (4) and (2) are satisfied and the corporate debtor is deemed to

have given preference at a relevant time to a related party or unrelated party,

as the case may be, such deemed preference may yet not be an offending

preference, if it falls into any or both of the exclusions provided by sub-section

(3) i.e., having been entered into during the ordinary course of business of the

corporate debtor or40 transferee or resulting in acquisition of new value for the

corporate debtor.

40  As noticed,  whether this expression “or”,  as occurring in between the expressions ‘corporate debtor’ and ‘transferee’ in clause (a) of sub-section (3) of Section 43, is to be read as “and” remains a question to be dealt with.

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Net concentrate of Section 43

19.5. Thus, the net concentrate of Section 43 is that if a transaction entered

into by a corporate debtor is not falling in either of the exceptions provided by

sub-section (3) and satisfies the three-fold requirements of sub-sections (4)

and (2), it would be deemed to be a preference during a relevant time, whether

or not in fact it were so; and whether or not it were intended or anticipated to

be so.

20. The analysis foregoing leads to the position that in order to find as to

whether  a  transaction,  of  transfer  of  property  or  an  interest  thereof  of  the

corporate debtor, falls squarely within the ambit of Section 43 of the Code,

ordinarily, the following questions shall have to be examined in a given case:

(i). As to whether such transfer is for the benefit  of a creditor or a

surety or a guarantor?

(ii). As to whether such transfer is for or on account of an antecedent

financial  debt  or  operational  debt  or  other  liabilities  owed  by  the

corporate debtor?

(iii). As to whether such transfer has the effect of putting such creditor

or surety or guarantor in a beneficial position than it would have been in

the  event  of  distribution  of  assets  being  made  in  accordance  with

Section 53?

(iv). If such transfer had been for the benefit of a related party (other

than an employee), as to whether the same was made during the period

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of two years preceding the insolvency commencement date; and if such

transfer had been for the benefit of an unrelated party, as to whether the

same was made during the period of one year preceding the insolvency

commencement date?

(v) As  to  whether  such  transfer  is  not  an  excluded  transaction  in

terms of sub-section (3) of Section 43?  

21. Having taken note of the salient features of Section 43 of the Code and

the questions germane for its applicability over any transaction, we may now

examine the questions calling for determination in these appeals. Obviously, if

the transactions in question are to fall squarely within the mischief of Section

43, they must satisfy all the specifications and ingredients of sub-sections (2)

and (4) of Section 43 and ought not to be within the exclusion provided in sub-

section (3) thereof.  

Whether impugned transactions are preferential, falling within the ambit

of sub-section (2) of Section 43 IBC

22. For the purpose of dealing with the crucial question as to whether the

impugned transactions are preferential and fall within the prescription of sub-

section (2) of Section 43 of the Code, appropriate it shall be to recapitulate and

summarize the overall scenario of this case.  

22.1. The  fact  that  JAL,  a  public  listed  company  with  more  than  5  lakh

individual shareholders, is the holding company of the corporate debtor JIL is

neither of any doubt nor of any dispute. As on 31.03.2017, JAL owned 71.64%

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of shares of JIL, having a value of Rupees 995 crores. The background had

been that when in the year 2003, JAL was awarded the rights for construction

of  an  expressway and a  concession  agreement  was entered  into  with  the

Yamuna Expressway Industrial  Development Authority, JIL was set up as a

special  purpose vehicle.  Finance was obtained from a consortium of banks

against  partial  mortgage  of  land  acquired  and  pledge  of  51%  of  the

shareholding of JAL. Housing plans were envisaged for construction of real

estate projects in two locations of the land acquired, one in Wish Town, Noida

and another in Mirzapur.  

22.1.1. Shorn of  other  details  which may not  be necessary  for  the present

purpose, relevant it is to notice that JIL was declared NPA by Life Insurance

Corporation  of  India  on  30.09.2015  and  by  some  of  its  other  lenders  on

31.03.2016. Then,  IDBI Bank Limited instituted a petition under Section 7 of

the Code before NCLT, seeking initiation of Corporate Insolvency Resolution

Process against JIL, while alleging that JIL had committed a default to the tune

of Rs. 526.11 crores in repayment of its dues.  On 09.08.2017, NCLT passed

an order under Section 7 of the Code and appointed an Interim Resolution

Professional41-42.  The  IRP  made  an  application  on  06.02.2018,  seeking

directions that the transactions entered into by the directors and promoters of

corporate  debtor  creating  mortgages  of  858  acres  of  immovable  property

41 CIRP in relation to JIL is underway by virtue of the orders passed by this Court on 09.08.2018 and  06.11.2019 (as referred to in paragraphs 6.2 and 6.3.1 - supra) 42 This date i.e., 09.08.2017 is the “insolvency commencement date” for the purpose of the questions  under consideration

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owned by it to secure the debts of JAL are preferential, undervalued, wrongful,

and fraudulent; and hence, the security interest created by corporate debtor

JIL in  favour  of  the  lenders  of  JAL be  discharged and such properties  be

deemed  to  be  vested  in  corporate  debtor.  The  NCLT  allowed  the  said

application on 16.05.2018 with respect  to six of  the impugned transactions

covering about  758 acres of  land.  On the appeals filed by lenders of  JAL,

NCLAT, by its impugned order dated 01.08.2019, set aside the order passed

by NCLT and held that  such lenders of  JAL were entitled to exercise their

rights under the Code.

22.2. At this juncture, we may again take note of the transactions that were

questioned by IRP for the purpose of the application for avoidance, which had

been the following: 1. Mortgage deed dated 29.12.2016 for 167.229 acres of

land  (Property  No.  1)  executed  by  JIL in  favour  of  Axis  Trustee  Services

Limited to provide an additional security for term loans of Rs. 21081.5 crores

sanctioned as a consortium to JAL; 2. Mortgage deed dated 29.12.2016 for

167.9615 acres of land (Property No. 2), again executed by JIL in favour of

Axis Trustee Services Limited to provide an additional security for term loans

of Rs.21081.5 crores sanctioned by the consortium to JAL; 3. Mortgage deed

dated 07.03.2017 for 158.1739 acres of land (Property No. 3) executed by JIL

in favour of IDBI Trustee-ship Services Limited for term loan of Rs.1200 crores

granted  by  ICICI  Bank  to  JAL;   4.  Mortgage  deed  dated  07.03.2017  for

151.0063 acres of land (Property No. 4), again executed by JIL in favour of

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IDBI Trustee-ship Services Limited for term loan of Rs.1200 crores granted by

ICICI Bank to JAL;  5. Mortgage deed dated 24.05.2016 for 25.0040 acres of

land (Property No. 5) executed by JIL in favour of IDBI Trustee-ship Services

Limited, as additional security against the facility agreement dated 29.08.2012

between  Standard  Chartered  Bank  and  JAL for  Rs.400  crores  and  other

facilities, respectively for Rs.450 crores, Rs.538.16 crores and Rs.81.84 crores

as also for working capital  facility  of  Rs.297 crores; and 6.  Mortgage deed

dated 04.03.2016 for 90 acres of land (Property No. 6), executed by JIL in

favour of State Bank of India for Short Term Loan Facility to JAL to the tune of

Rs.1000 crores.

22.2.1. As noticed, 09.08.2017 is the insolvency commencement date in this

case. The transactions in question, even if of putting the concerned properties

under mortgage with the lenders, carry the ultimate effect of working towards

the benefit and advantage of the borrower i.e., JAL who obtained loans and

finances by virtue of such transactions. It is true that there had not been any

creditor-debtor relationship between the lender banks and corporate debtor JIL

but that will not be decisive of the question of the ultimate beneficiary of these

transactions. The mortgage deeds in question, entered by the corporate debtor

JIL to  secure  the  debts  of  JAL,  obviously,  amount  to  creation  of  security

interest to the benefit of JAL.

22.2.2. Now,  the  capacity  of   JAL is admittedly that of the holding company

of   JIL   as   its   largest  equity  shareholder  ( with  approximately  71.64 %  

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shareholding). Moreover, JAL had admittedly been the operational creditor of

JIL, for an amount of approximately Rs. 261.77 crores. JAL itself maintains

that it  had been providing financial, technical and strategic support to JIL in

various ways. It is the assertion that apart from making investment in terms of

equity  shareholding  to  the  tune  of  Rs.  995  crores,  JAL  had  pledged  its

70,83,56,087 equity shares held in JIL in favour of the lenders of JIL; had also

entered into Promoter Support Agreement to the lenders of JIL to meet the

DSRA obligation of JIL towards its lenders; and had further extended Bank

Guarantees  of  Rs.  212 crores  to  meet  the  DSRA obligation  of  JIL.  These

assertions, in our view, put JAL in such capacity that it is a related party to JIL

and is a creditor as also surety of JIL. In other words, the corporate debtor JIL

owed antecedent financial debts as also operational debts and other liabilities

towards JAL.  

22.3. In the scenario taken into comprehension hereinabove, there is nothing

to doubt that the corporate debtor JIL has given a preference by way of the

mortgage transactions in question for the benefit of its related person JAL (who

has been the creditor as also surety for JIL) for and on account of antecedent

financial  debts,  operational  debts  and other liabilities owed to  such related

person. In the given fact situation, it is plain and clear that the transactions in

question meet  with all  the requirements of  clause (a)  of  sub-section (2)  of

Section 43.  

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22.4. It is also not far to seek that in the given scenario, the requirements of

clause (b) of sub-section (2) of Section 43 are also met fair and square. On

behalf of the respondents, emphasis is laid on the fact that in the distribution

waterfall  in  case  of  liquidation  (per  Section  53  of  the  Code),  JAL,  as  an

operational creditor, stands much lower in priority than the other creditors and

stakeholders. Such submissions, in our view, only strengthen the position that

by way of the impugned transfers, JAL is put in a much beneficial position than

it  would  have  been  in  the  absence  of  such  transfers.  It  has  rightly  been

contended on behalf of the appellants that with the transactions in question,

JAL has been put in an advantageous position vis-à-vis other creditors on the

counts that: a) JAL received a huge working capital (approx. Rupees 30000

crores), by way of loans and facilities extended to it by the respondent-lenders;

and b) by way of the transactions in question, JAL’s liability towards its own

creditors shall be reduced, in so far as the value of the mortgaged properties is

concerned, which is said to be approximately Rs. 6000 crores. As a necessary

corollary of the beneficial and advantageous position of the related party JAL

with  creation  of  such  security  interest  over  the  properties  of  JIL,  in  the

eventuality of distribution of assets under Section 53, the other creditors and

stakeholders  of  JIL  shall  have  to  bear  the  brunt  of  the  corresponding

disadvantage because such heavily encumbered assets will not form the part

of  available  estate  of  the  corporate  debtor.  Obviously,  JAL stands  dearly

benefited and has derived such benefits at the cost, and in exclusion, of the

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other creditors and stakeholders of the corporate debtor JIL. The applicability

of clauses (a) and (b) of sub-section (2) of Section 43 of the Code is clear and

complete in relation to the impugned six transactions.  

22.5. Therefore, in relation to the present case, the answers to questions (i),

(ii) and (iii) as referred in paragraph 20 are that: the impugned transactions

had been of  transfers  for  the benefit  of  JAL,  who is a related party of  the

corporate debtor  JIL and is  its  creditor  and surety  by  virtue of  antecedent

operational  debts as also other facilities extended by it;  and the impugned

transactions have the effect of putting JAL in a beneficial position than it would

have been in the event of distribution of assets being made in accordance with

Section 53 of the Code. Thus, the corporate debtor JIL has given a preference

in the manner laid down in sub-section (2) of Section 43 of the Code.

The requirements of sub-section (4) of Section 43 IBC - related party and  look-back period  

23. Even when all the requirements of sub-section (2) of Section 43 of the

Code are satisfied, in order to fall within the mischief sought to be remedied by

Section 43, the questioned preference ought to have been given at a relevant

time. In other words, for a preference to become an avoidable one, it ought to

have been given within the period specified in sub-section (4) of Section 43.

The extent of ‘relevant time’ is different with reference to the relationship of the

beneficiary  with  the  corporate  debtor  inasmuch  as,  for  the  persons  falling

within the expression ‘related party’ within the meaning of Section 5 (24) of the

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Code, such period is of two years before the insolvency commencement date

whereas it is one year in relation to the person other than a related party. The

conceptions of, and rationale behind, such provisions could be noticed in the

excerpts from the interim report of Law Reforms Committee, as referred on

behalf of the appellants.  We may usefully extract the same as under: -  

“c. TRANSACTIONS WITH RELATED PARTIES  The law on avoidance in the UK provides for close scrutiny of

transactions  entered  into  with  persons  connected  with  the company  (other  than  employees)  by  incorporating  longer  time periods in relation to which such transactions can be challenged. Thus, while the relevant time period for avoiding preferences is six months  prior  to  the  onset  of  insolvency,  the  time  period  is increased to two years in the case of persons connected with the company.  Similarly, for late floating charges other than for new value, the vulnerability period for non-connected persons is twelve months while it is two years in the case of connected persons. The avoidance  provisions  under  the  CA 2013  does  not  provide  for longer time periods in case the transactions are with connected persons.  It is submitted that providing for longer time periods for vulnerability would be significant in improving the efficacy of these provisions.  This  is  because  a  wider  range  of  transactions diminishing creditor wealth entered into with insiders occur not in the ‘zone of insolvency’ but as soon as early signals of trouble are visible. Such insiders have superior information of the company’s deteriorating  financial  position  and  may  raid  corporate  assets knowing  that  the  company  may  become  insolvent.  These provisions are of special significance in the Indian context where even the  larger  corporates  are  often  promoter/family  controlled with  such  insiders  often  enjoying  significant  informational advantages over even well-advised secured lenders.”

23.1. Before examining as to whether the questioned preferences were given

at the relevant time as specified in sub-section (4) of Section 43, we may deal

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with one part of the submissions made on behalf of some of the respondents

that in view of the look-back periods provided in sub-section (4), the provisions

of Section 43 of the Code, by their very nature, would come into operation at

least one year after the enactment of the Code and else, it would be giving

retrospective  effect  to  these  provisions  which  is  not  permissible. The

submissions, in our view, remain bereft of substance.  

23.1.1. The scheme of IBC is to disapprove and disregard such preferential

transaction which falls within the ambit of Section 43 and to ensure that any

property likely to have been lost due to such transaction is brought back to the

corporate  debtor;  and  if  any  encumbrance  is  created,  to  remove  such

encumbrance so as to bring the corporate debtor back on its wheels or in other

event (of liquidation), to ensure  pro rata, equitable and just distribution of its

assets.  Such  provisions  as  contained  in  Sections  43  and  44  came  into

operation as the comprehensive scheme of  corporate insolvency resolution

and liquidation from the date of  being made effective;  and merely because

look-back period  is  envisaged,  for  the purpose of  finding  ‘relevant  time’,  it

cannot be said that the provision itself is retrospective in operation. Reference

to  the  decision  of  this  Court  in  the  case  of  Purbanchal  Cables (supra)  is

entirely inapt. In the said case, by virtue of the enactment in question, i.e.,

Interest  on  Delayed  Payments  to  Small  Scale  and  Ancillary  Industrial

Undertakings Act,  1993, a new liability  of  high rate of  interest  was created

against the buyer in displacement of the general principles of Section 34 of the

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Code of Civil Procedure. Hence, this Court found that the enactment creating

new liability  would  only  be prospective in  operation.  As noticed,  fraudulent

preferences in the affairs  of  corporate persons had been dealt  with by the

legislature in the Companies Act, 1956 and have also been dealt with in the

Act  of  2013.  Though  therein,  essentially,  the  fraudulent  preferences  and

transfers  not  in  good faith  are  dealt  with  whereas,  in  the  scheme of  IBC,

separate  provisions  are  made  as  regards  the  transactions  intended  at

defrauding  the  creditors  (Section  49  IBC)  as  also  for  fraudulent  trading  or

wrongful  trading (Section 66 IBC).  The provisions contained in Section 43,

however, indicate the intention of legislature that when a preference is given at

a  relevant  time  and  thereby,  the  beneficiary  of  preference  acquires

unwarranted better position in the event of  distribution of  assets,  the same

may not be countenanced. Looking to the scheme of IBC and the principles

applicable for the conduct of the affairs of a corporate person, it cannot be said

that anything of  a new liability has been imposed or a new right has been

created. Maximisation of value of assets of corporate persons and balancing

the  interests  of  all  the  stakeholders  being  the  objectives  of  the  Code,  the

provisions therein need to be given fuller effect in conformity with the intention

of the legislature.  

23.1.2. We may also observe that if  the contentions urged on behalf  of the

respondents  were  to  be  accepted,  the  result  would  be  of  postponing  the

effective date of operation of sub-section (4) of Section 43 by two years in the

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case of  related  party  and to  one year  in  the  case of  unrelated party,  and

thereby, effectively postponing the application of entire Section 43 for a period

of two years! That cannot be and had never been the intention of legislature. It

is also noteworthy that by virtue of proviso to sub-section (3) of Section 1 of

the  Code,  different  dates  can  be  provided  for  enforcement  of  different

provisions of the Code; and in fact, different provisions have been brought into

effect on different dates. However, after coming into force of the provisions, if a

look-back period is provided for the purpose of any particular enquiry, it cannot

be said that the operation of the provision itself would remain in hibernation

until such look-back period from the date of commencement of the provision

comes to an end. There is nothing in the Code to indicate that any provision in

Chapter II or Chapter III be taken out and put in operation at a later date than

the date notified. Such contentions being totally devoid of substance, deserve

to be, and are, rejected.        

24.  We may now take  up  the  question  as  to  which  of  the  transactions  in

question would entail in giving preference at a relevant time or otherwise. As

noticed, the preference is given to JAL who is a related party of JIL. Hence, the

look-back period is two years preceding insolvency commencement date i.e.,

09.08.2017 per clause (a) of sub-section (4) of Section 43; and accordingly,

the point of enquiry would be as to whether the preference had been given

during  the  period  of  two  years  preceding  09.08.2017.  Therefore,  the

transactions  commencing  from  10.08.2015  until  the  date  of  insolvency

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commencement shall fall under the scanner. As noticed, it has been one of the

major contentions of the respondents that most of the impugned transactions

were not of creation of any new encumbrance by JIL and in fact, most of the

properties in question had already been under mortgage with the respective

lenders  much  before  the  period  under  consideration  i.e.,  much  before

10.08.2015.  

24.1. It may at once be noticed that the transaction that was clearly falling

beyond the period under consideration was, in fact, kept out of the purview of

Section 43 of the Code by NCLT itself, being that relating to Property No. 7 (as

mentioned in paragraph 4.5 hereinbefore).  

24.2. So far as the transaction relating to Property No. 6 is concerned, being

the mortgage deed dated 04.03.2016, towards Short-Term Loan Facility to JAL

of Rs. 1000 crores by State Bank of India, the same obviously falls within the

look-back period. Even if JAL had allegedly entered into the facility agreement

with this lender bank on 26.03.2015, this date is hardly of any bearing so far as

transaction by the corporate debtor JIL is concerned, which was made only on

04.03.2016.  

24.3. In relation to the transactions concerning Property No. 1 and Property

No. 2, for securing loans by the Consortium to JAL, it is submitted that there

had been initial mortgage dated 24.02.2015 that was released on 15.09.2015

and a so-called re-mortgage was made on 15.09.2015 and thereafter, this was

also released on 29.12.2016 and again the so-called re-mortgage was made

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on 29.12.2016.  It  is  sought  to be asserted that  it  had not  been a case of

creation  of  a  fresh  mortgage.  Similarly,  in  relation  to  the  transactions

concerning Property No. 3, it is alleged that there had been initial mortgage

dated 12.05.2014 for 433.35 acres of land of which, 240 acres was released

on 30.12.2015, 35.05 acres was released on 24.06.2016 and the remaining

158.1739  acres  of  land  was  also  released  on  07.03.2017  but  was  re-

mortgaged  on  this  very  date  07.03.2017.  As  regards  Property  No.  4,  it  is

alleged that the same was put under mortgage initially on 12.05.2014, was

released on 07.03.2017 and was re-mortgaged on this very date 07.03.2017.

As regards Property No. 5, it is alleged that the same was put under mortgage

initially  on  24.06.2009,  the  mortgage was  extended on 27.11.2012 and on

23.03.2013;  it  was  released  on  04.11.2015  and  was  re-mortgaged  on

24.05.2016.  

24.3.1. It has been one of the major contentions of the respondents that most

of the impugned transactions were not of creation of any new encumbrance by

JIL and in fact,  most of  the properties in question had already been under

mortgage  with  the  respective  lenders.  The  submissions  of  respondents  in

relation to the aforesaid five transactions, that they had been of so-called re-

mortgage/s, carry their own shortcomings and cannot be accepted. In the first

place,  we  are  clearly  of  the  view  that  on  release  by  the  mortgagee,  the

mortgage ceases to exist and it is difficult to countenance the concept of a so-

called  re-mortgage.  The  so-called  re-mortgage,  on  all  its  legal  effects  and

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connotations, could only be regarded as a fresh mortgage; and it obviously

befalls on the mortgagor to consider at the time of creating any fresh mortgage

as whether such a transaction is expedient and whether it should be entered

into at all. Noticeable it is that in relation to Property No. 1 and 2, even if the

initial  mortgage  had  been  dated  24.02.2015  falling  beyond  the  look-back

period, it was released on 15.09.2015 and this date (15.09.2015) falls within

the look-back period. Even if the same property has been again mortgaged

with  the  same lender/s  on  the  same day  of  release,  the  same cannot  be

countenanced  for  the  transaction  operates  towards  extending  unwarranted

preference to JAL by the corporate debtor JIL. Significant it is to notice that

while  making  this  mortgage  dated  15.09.2015,  the  facility  amount  being

obtained by JAL got swelled from Rs. 3250 crores to a whopping Rs. 24109

crores and the number of creditors went up from 2 to 24. Such a transaction, in

our view, had only been of a fresh mortgage to secure extra facilities obtained

by JAL and thereby, extending unwarranted advantage to JAL at the cost of

the  estate  of  JIL.  In  the  other  transaction dated 29.12.2016,  by  which  the

properties in question were again put under mortgage with the lender/s, the

facility  amount  was  shown  as  Rs.  23491  crores.  The  transactions  on

15.09.2015 and 29.12.2016 cannot be given credence with reference to the

previous mortgage deed dated 24.02.2015. Similar is the case in relation to

Property No. 3. Even when the previous mortgage was given on 12.05.2014

i.e.,  beyond  the  look-back  period,  there  had  been  release  deeds  on

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30.12.2015 and 26.06.2016 as  regards  certain  parcels  of  land.  So far  the

release of land to JIL is concerned, the same causes no problem and only

works to the benefit of JIL and its stakeholders. However, when the remaining

land was also released on 07.03.2017, its fresh mortgage, even if on the same

date,  cannot  be  countenanced  and  is  hit  by  Section  43,  being  a  deemed

preference. The very same considerations apply in relation to the Property No.

4 too.  As regards Property  No.  5,  even if  there had been certain previous

mortgage transactions falling beyond the look-back period, the property got

released on 04.11.2015; and thereafter,  the fresh mortgage on 24.05.2016,

with increased facility amount from Rs. 1470 crores to Rs. 1767 crores, suffers

from the same vice, of being a deemed preference to a related party during the

period of two years preceding the insolvency commencement date.  

24.4. For what has been discussed hereinabove, the conclusion is inevitable

that the impugned preference was given to a related party during a relevant

time.  However,  before  concluding  on  this  part  of  discussion,  we may  also

observe that reference to the decisions of Madras and Bombay High Courts in

the case of IDBI Bank Ltd and  Monarch Enterprises respectively, is neither

apposite nor advances the cause of the respondents for the reason that the

said  decisions  had  essentially  been  on  the  question/s  as  to  whether  the

impugned  transactions  were  of  fraudulent  preference  per  Section  531  or

lacking in good faith per Section 531A of the Companies Act, 1956. In fact, in

the case of IDBI Bank (supra) the corporate debtor attempted to transfer one

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of its property to the appellant bank, who was one of its creditors and in that

regard,  certain  transactions  like  agreement  for  sale  and  handing  over

possession were suggested and it was alleged that the contract for sale was

partly  performed  about  one  year  and  four  months  prior  to  the  winding-up

proceedings; and such being beyond the look-back period of six months as

envisaged by Section 531 of the Companies Act, 1956, it was argued that it

had not been a fraudulent transfer. The contentions were not accepted by the

Single Judge and by the Division Bench of the High Court for the reason that

mere handing over of  possession or documents did not complete the sale;

rather the Court was of the view that such documents were created only in

order to avoid the transaction being called a fraudulent preference. Apart that

the element of fraud is not the essential ingredient of Section 43 of the Code,

the  said  decision  in  IDBI  Bank,  on  the  approach  of  the  Courts  towards

corporate  transactions  makes  it  clear  that  any  transaction  favouring  one

stakeholder  at  the  cost  of  the  other  is  viewed  with  disfavour  and  is

disapproved,  particularly  if  it  takes  place  during  the  prescribed  look-back

period.  

24.5. For what has been discussed hereinabove, the answer to question (iv)

as referred in paragraph 20 is that  the transactions in question had been of

deemed preference to related party JAL by the corporate debtor JIL during the

look-back period of two years and have rightly been held covered within the

period envisaged by sub-section (4) of Section 43 of the Code.  

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Ordinary course of business or financial affairs

25. Even  when  it  is  held  that  the  impugned  transactions  answer  to  the

requirements  of  sub-section  (2)  of  Section  43  and  fall  within  the  period

specified in sub-section (4) thereof, the question still remains as to whether the

impugned transactions do or do not fall within the exclusion provided by sub-

section (3) of Section 43 of the Code? As noticed, two types of transfers, as

specified in clauses (a) and (b) of sub-section (3) of Section 43, are not to be

treated  as  preference  for  the  purpose  of  sub-section  (2).  It  has  been  the

mainstay of  respondent-lenders that,  in  any case,  the transfers in question

were  made in  the  ordinary  course  of  their  business  and hence,  fall  within

clause (a) of Section 43(3) that excludes the transfer made in the ordinary

course of business or financial affairs of the corporate debtor or the transferee.

It has been forcefully argued that the lenders of JAL are the transferees in the

transactions  in  question  and  their  ordinary  course  of  business  being  of

providing financial support with loans and advances, such transfers are not

included in sub-section (2) of Section 43 by virtue of the exclusion provided in

sub-section (3) thereof. On the other hand, the main plank of submissions on

behalf of the appellants has been that the expression “or” occurring in clause

(a) of sub-section (3) of Section 43, seemingly disjunctive of corporate debtor

on one hand and transferee on the other, is required to be read as “and” so as

to be conjunctive and covering only the transfers made in the ordinary course

of business or financial affairs of the corporate debtor and the transferee. It is

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submitted on behalf  of  the appellants that  such mortgage transactions had

neither  been  in  the  ordinary  course  of  business  or  financial  affairs  of  the

corporate debtor JIL nor secure new value in the property acquired by the

corporate debtor and hence, are not excepted transactions within the meaning

of sub-section (3) of Section 43 of the Code.

25.1. Having  taken  into  comprehension  the  scheme  of  the  Code  and  the

purpose and purport of the provisions contained in Section 43, we find force

and substance in the submissions made on behalf of the appellants.

25.2. As noticed, in the scheme of such provisions in the Code, the underlying

concept is to disregard and practically annul such transactions which appear,

in the course of insolvency resolution or liquidation, to be preferential so as to

minimise the potential loss to other stakeholders in the affairs of the corporate

debtor, particularly its creditors. What is to be examined for the purpose of

Section 43 is the conduct and affairs of the corporate debtor. If the beneficiary

of the transaction in question is a related party of the corporate debtor, the

period of enquiry is enlarged to two years whereas this period is one year in

other cases. During such scanning, by virtue of sub-section (3) of Section 43,

two types of transfers are kept out of the purview of sub-section (2), which

would  not  be  treated  as  preference.  Though  in  the  present  case,  we  are

concerned only with the phraseology occurring in clause (a) of sub-section (3)

but,  we  may  usefully  refer  to  clause  (b)  thereof,  for  an  insight  into  the

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underlying concept for providing exception in regard to certain transfers and

keeping them out of the purview of ‘preference’.  

25.2.1. By  virtue  of  clause  (b)  of  sub-section  (3)  [read  with  Explanation

thereto], any transfer creating a security interest in the property ‘acquired’ by

the corporate debtor is not to be treated as preference to the extent that such

security interest secures new value in monetary terms or in terms of goods,

services or new credit or in release of a previously transferred property. Any

micro dissection of clause (b) of sub-section (3) of Section 43 is not required in

the present case. Suffice it to notice that even a bare look at the provision

brings  forth  the  concept  that  value  enhancement  or  strengthening  of  the

corporate debtor ought to be the result of a transfer, if it is to remain out of the

ambit of sub-section (2) and not to fall within the mischief of being preferential.

25.2.2.  Another feature of vital importance is that the matter is examined with

reference to the dealing and conduct  of  the corporate debtor;  and  qua the

health  and  prospects  of  the  corporate  debtor.  Applying  the  well-known

principles  of  noscitur  a  sociis,  whereunder  the  questionable  meaning  of  a

doubtful  word  could  be  derived  and  understood  from  its  associates  and

context; and usefully recapping that the scheme of Section 43 of the Code is

essentially  of  scanning  through  the  affairs  of  the  corporate  debtor  and  to

discredit and disregard such transaction by the corporate debtor which tends

to give unwarranted benefit to one of its creditor/surety/guarantor over others,

in our view, the purport of clause (a) of sub-section (3) of Section 43 is also

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principally directed towards the corporate debtor’s dealings. In other words,

the whole of conspectus of sub-section (3) is that only if any transfer is found

to have been made by the corporate debtor, either in the ordinary course of its

business or financial affairs or in the process of acquiring any enhancement in

its value or worth, that might be considered as having been done without any

tinge of favour to any person in preference to others and thus, might stand

excluded from the purview of being preferential, subject to fulfilment of other

requirements of sub-section (3) of Section 43.  

25.3. Needless to reiterate that if the transfer is examined with reference to

the ordinary course of business or financial affairs of the transferee alone, it

may conveniently get excluded from the rigour of sub-section (2) of Section 43,

even if not standing within the scope of ordinary course of business or financial

affairs of the corporate debtor. Such had never been the scheme of the Code

nor the intent of Section 43 thereof. It has rightly been contended on behalf of

the appellants that for the purpose of exception under clause (a) of sub-section

(3) of Section 43, the intent of legislature is required to be kept in view. If the

ordinary course of business or financial affairs of the transferee (lenders of JAL

in  the  present  case)  would  itself  be  decisive  for  exclusion,  almost  every

transfer  made  to  the  transferees  like  the  lender-banks/financial  institutions

would be taken out of the net, which would practically result in frustrating the

provision itself.  

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25.4. It remains trite that an interpretation that defeats the scheme, intent and

object  of  the  statutory  provision  is  to  be  eschewed  and  for  that  matter,  if

necessary,  by applying the principles of  purposive interpretation rather than

literal. In the case of R.M.D. Chamarbaugwala (supra), the Constitution Bench

of  this  Court  has held that  well  known cannons of  construction of  statutes

permit  the  Court  to  read  the  word  “or”  as  “and”  after  looking  at  the  clear

intention of the legislature.  In the case of Mazagaon Dock Ltd (supra), when

the expression “or” occurring in sub-section (2) of Section 42 of the Income

Tax Act, 1922 did appear bringing out the result which could not have been

intended, the same was read in the context as meaning “and”. This Court said:

“10.  The  word  “or”  in  the  clause  would  appear  to  be  rather inappropriate, as it is susceptible of the interpretation that when some profits are made but they are less than normal profits, tax could only be imposed either on the one or on the other, and that accordingly  a  tax  on  the  actual  profits  earned  would  bar  the imposition  of  tax  on  profits  which  might  have  been  received. Obviously, that could not have been intended, and the word “or” would have to be read in the context as meaning “and”….”

25.5. Looking to the scheme and intent of  the provisions in question and

applying  the  principles  aforesaid,  we  have  no  hesitation  in  accepting  the

submissions made on behalf of the appellants that the said contents of clause

(a) of sub-section (3) of Section 43 call for purposive interpretation so as to

ensure that the provision operates in sync with the intention of legislature and

achieves the avowed objectives. Therefore, the expression “or”, appearing as

disjunctive between the expressions “corporate debtor” and “transferee”, ought

to  be  read  as  “and”;  so  as  to  be  conjunctive  of  the  two  expressions  i.e.,

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“corporate debtor” and “transferee”. Thus read, clause (a) of sub-section (3) of

Section 43 shall mean that, for the purposes of sub-section (2), a preference

shall not include the transfer made in the ordinary course of the business or

financial affairs of  the corporate debtor  and the transferee. Only by way of

such reading of “or” as “and”, it could be ensured that the principal focus of the

enquiry on dealings and affairs of the corporate debtor is not distracted and

remains on its trajectory, so as to reach to the final answer of the core question

as  to  whether  corporate  debtor  has  done  anything  which  falls  foul  of  its

corporate responsibilities.  

25.6. The result of discussion in the foregoing paragraphs is that the transfers

in  question  could  be  considered  outside  the  purview  of  sub-section  (2)  of

Section 43 of the Code only if it could be shown that same were made in the

‘ordinary course of business or financial affairs’ of the corporate debtor JIL and

the transferees. Even if transferees submit that such transfers had been in the

ordinary  course  of  their  business,  the  question  would  still  remain  if  the

transfers were made in the ordinary course of business or financial affairs of

the corporate debtor JIL so as to fall within the exception provided by clause

(a) of sub-section (3) of Section 43 of the Code.  

25.6.1. Thus, the enquiry now boils down to the question as to whether the

impugned transfers were made in the ordinary course of business or financial

affairs of  the corporate debtor JIL.  It  remains trite that an activity could be

regarded as ‘business’ if there is a course of dealings,which are either actually

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continued or contemplated to be continued with a profit motive.43 As regards

the  meaning  and essence of  the expression  ‘ordinary  course of  business’,

reference made by the appellants to the decision of the High Court of Australia

in Downs Distributing Co (supra), could be usefully recounted as under:-

“As was pointed out in Burns v. McFarlane the issues in sub-s. 2(b) of s. 95 of the Bankruptcy Act 1924-1933 are “(1) good faith; (2) valuable consideration; and (3) ordinary course of business.” This last expression it was said “does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor.” It is an additional requirement and is cumulative  upon  good  faith  and  valuable  consideration.  It  is, therefore,  not  so  much  a  question  of  fairness  and absence  of symptoms  of  bankruptcy  as  of  the  everyday  usual  or  normal character of the transaction. The provision does not require that the  transaction  shall  be  in  the  course  of  any  particular  trade, vocation  or  business.  It  speaks  of  the  course  of  business  in general. But it does suppose that according to the ordinary and common  flow  of  transactions  in  affairs  of  business  there  is  a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.”

(emphasis supplied)

25.6.2. Taking up the transactions in question, we are clearly of the view that

even when furnishing a security may be one of normal business practices, it

would become a part of ‘ordinary course of business’ of a particular corporate

entity only if it falls in place as part of ‘the undistinguished common flow of

business done’; and is not arising out of ‘any special or particular situation’, as

rightly expressed in  Downs Distributing Co (supra). Though we may assume

43 vide State of Andhra Pradesh v. H. Abdul Bakshi and Bros.: 1964 STC 644 (at p. 647).    

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that  the  transactions  in  question  were  entered  in  the  ordinary  course  of

business of bankers and financial institutions like the present respondents but

on the given set of  facts,  we have not an iota of  doubt that the impugned

transactions do not fall within the ordinary course of business of the corporate

debtor JIL.  As noticed, the corporate debtor has been promoted as a special

purpose vehicle by JAL for construction and operation of Yamuna Expressway

and for  development  of  the parcels  of  land along with  the expressway for

residential, commercial and other use. It is difficult to even surmise that the

business of  JIL,  of  ensuring execution of  the works assigned to its holding

company and for execution of housing/building projects, in its ordinary course,

had  inflated  itself  to  the  extent  of  routinely  mortgaging  its  assets  and/or

inventories to secure the debts of its holding company. It had also not been the

ordinary course of financial affairs of JIL that it would create encumbrances

over its properties to secure the debts of its holding company. In other words,

we are clearly of  the view that the ordinary course of business or financial

affairs  of  the corporate debtor  JIL cannot  be taken to  be that  of  providing

mortgages to secure the loans and facilities obtained by its holding company;

and that too at the cost of its own financial health.  As noticed, JIL was already

reeling under debts with its accounts with some of the lenders having been

declared NPA; and it was also under heavy pressure to honour its commitment

to the home buyers.  In the given circumstances,  we have no hesitation in

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concluding that the transfers in questions were not made in ordinary course of

business or financial affairs of the corporate debtor JIL.

25.7. The submissions that security was disclosed in the Annual Reports or

that none of the creditors expressed dissent are of no effect because such

disclosure or want of objection by creditors, by themselves, do not operate as

estoppel against anybody nor would take the transaction out of the purview of

the legal fiction predicated in Section 43, if it is otherwise of a preference at a

relevant time. Similarly, the distinction between ‘NPA’ and ‘wilful default’; the

submission that NPA could be regularised; and further the submission that the

mortgages  were  created  before  JIL was  declared  NPA,  are  hardly  of  any

bearing on the question as to whether the impugned transactions had been in

the ordinary course of business or financial affairs of JIL. Thus, reference to

the decisions like that in Keshavlal Khemchand and Jah Developers (supra) is

not of any consequence and need not be dilated upon.  The answer to this

question, in our view, could only be in the negative. That is to say that the

impugned transactions had not  been in the ordinary course of  business or

financial affairs of JIL.

25.8. Therefore, the answer to question (v) as referred in paragraph 20 is that

the  impugned  transactions  are  not  of  excepted  transfers  in  terms  of  sub-

section (3) of Section 43 of the Code.

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The concern expressed by lenders of JAL is legally untenable

26.  The argument of lenders, that  holding the transactions in question as

preferential would result in impacting large number of transactions undertaken

by the bankers/financial institutions, of financing in the ordinary course of their

business; and the consequences may be devastating and irreversible on the

economy, has only been noted to be rejected.

26.1. It  needs  hardly  any  emphasis  that  in  the  ordinary  course  of  their

business, when the bankers or financial institutions examine any proposal for

loan or advance or akin facility, they are supposed to, and they indeed, take up

the exercise commonly termed as ‘due diligence’44 so as to study the viability

of  the  proposed  enterprise  as  also  to  ensure,  inter  alia,  that  the  security

against  such loan/advance/facility  is  genuine  and  adequate;  and would  be

available for enforcement at any point of time. Given the nature of transaction,

the lenders must prefer a clean security to justify the transaction as being in

the ordinary course of their business. In the same exercise, in the ordinary

course of their business, if they are at all entering into a transaction whereby a

third party security, including that of a subsidiary company, is to be taken as

collateral, they are obliged to undertake further due diligence so as to ensure

44 As regards the present context,  the term ‘due diligence’ is explained in P.  Ramanatha Aiyar’s Advanced Law Lexicon (5th Ed.-Vol 2, p.1654)  in the following:

“The detailed review of the borrower/issuer’s overall position, which is supposed to be undertaken by the lead manager of a new financing in conjunction with the preparation of legal documentation.

Analysis  of  the financial  status and prospects  of  company before it  receives a major investment of capital. It is usually carried out by an independent accountant.”

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that such third party security is a prudent and viable one and is not likely to be

hit  by  any  law.  In  that  sequence,  they  remain  under  obligation  to  assure

themselves that such third party whose security is being taken, is not already

indebted or in red and is not likely to fail in dealing with its own indebtedness.

In the context of IBC, such requirement is moreover imperative on a bare look

at the provisions contained in Part II thereof. Interesting it is to notice on the

facts of the present case that in fact, several of the respondent lenders are

shown to be the direct creditors of JIL too, to the extent of the advances made

to JIL. They and the co-respondents cannot plead ignorance about the actual

state of affairs and financial position of JIL. Despite such knowledge, if they

chose to take the business risk of accepting security from JIL and that too, for

securing the loans/advances/facilities made over to JAL, who was a directly

related party  of  JIL for  being its  holding company,  they themselves remain

responsible for present legal consequences.  

Summation: The transactions in question are hit by Section 43 IBC

27. For what has been discussed hereinabove, we are clearly of the view

that the transactions in question are hit by Section 43 of the Code and the

Adjudicating  Authority,  having  rightly  held  so,  had  been  justified  in  issuing

necessary  directions in  terms of  Section 44 of  the Code in  relation to  the

transactions concerning Property Nos. 1 to 6.  NCLAT, in our view, had not

been right in interfering with the well-considered and justified order passed by

NCLT in this regard.

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Search and commandeering of preference at a relevant time

28. Although we have analysed the transactions in question on the anvil of

Section  43  with  reference  to  the  submissions  made  and  the  facts  of  the

present case but, before moving on to other aspects, we deem it appropriate

to point out the manner in which the provisions concerning preference at a

relevant  time  are  expected  to  be  applied,  particularly  by  the  resolution

professional, in a given case. It could be readily recapitulated that as per the

charging parts of Section 43 i.e., sub-sections (4) and (2) thereof, a corporate

debtor shall be deemed to have given preference at a relevant time if the twin

requirements  of  clauses  (a)  and  (b)  of  sub-section  (2)  coupled  with  the

applicable requirements of either clause (a) or clause (b) of sub-section (4), as

the case may be,  are satisfied.  However,  even if  the requirements of  sub-

sections (4) and (2) are satisfied, a transaction may not be regarded as an

offending preference if it falls in either or both of the exceptions provided by

sub-section (3) of Section 43.

28.1. Looking to the legal fictions created by Section 43 and looking to the

duties  and responsibilities  per  Section  25,  in  our  view,  for  the  purpose of

application of Section 43 of the Code in any insolvency resolution process,

what a resolution professional is ordinarily required to do could be illustrated

as follows:

1.  In the first place, the resolution professional shall have to take

two major but distinct steps. One shall be of sifting through the entire

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cargo of transactions relating to the property or an interest thereof of the

corporate  debtor  backwards  from  the  date  of  commencement  of

insolvency and up to the preceding two years. The other distinct step

shall be of identifying the persons involved in such transactions and of

putting them in two categories; one being of the persons who fall within

the definition of ‘related party’ in terms of Section 5(24) of the Code and

another of the remaining persons.  

2. In the next step, the resolution professional ought to identify as to

in which of the said transactions of preceding two years, the beneficiary

is a related party of the corporate debtor and in which the beneficiary is

not  a  related  party.  It  would  lead  to  bifurcation  of  the  identified

transactions into two sub-sets: One concerning related party/parties and

other  concerning  unrelated  party/parties  with  each  sub-set  requiring

different analysis. The sub-set concerning unrelated party/parties shall

further  be trimmed to include only  the transactions of  preceding one

year from the date of commencement of insolvency.

3. Having thus obtained two sub-sets of  transactions to scan, the

steps thereafter would be to examine every transaction in each of these

sub-sets  to  find:  (i)  as  to  whether  the  transaction  is  of  transfer  of

property  or  an interest  thereof  of  the corporate debtor;  and (ii)  as to

whether the beneficiary involved in the transaction stands in the capacity

of creditor or surety or guarantor qua the corporate debtor. These steps

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shall lead to shortlisting of such transactions which carry the potential of

being preferential.  

4. In  the  next  step,  the  said  shortlisted  transactions  would  be

scrutinised to find if the transfer in question is made for or on account of

an antecedent financial debt or operational debt or other liability owed

by the corporate debtor. The transactions which are so found would be

answering to clause (a) of sub-section (2) of Section 43.   

5. In  yet  further  step,  such  of  the  scanned  and  scrutinised

transactions that are found covered by clause (a) of sub-section (2) of

Section  43  shall  have  to  be  examined  on  another  touchstone  as  to

whether the transfer in question has the effect of putting such creditor or

surety or guarantor in a beneficial position than it would have been in

the event of distribution of assets per Section 53 of the Code. If answer

to this question is in the affirmative, the transaction under examination

shall be deemed to be of preference within a relevant time, provided it

does not fall within the exclusion provided by sub-section (3) of Section

43.  

6. In  the  next  and  equally  necessary  step,  the  transaction  which

otherwise  is  to  be  of  deemed preference,  will  have  to  pass  through

another filtration to find if it does not answer to either of the clauses (a)

and (b) of sub-section (3) of Section 43.

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7. After  the  resolution  professional  has  carried  out  the  aforesaid

volumetric  as  also  gravimetric  analysis  of  the  transactions  on  the

defined coordinates, he shall  be required to apply to the Adjudicating

Authority for necessary order/s in relation to the transaction/s that had

passed through all the positive tests of sub-section (4) and sub-section

(2) as also negative test of sub-section (3).

28.2. On a motion made by the resolution professional after and in terms of

the  exercise aforesaid,  the Adjudicating Authority,  in  its  turn,  shall  have to

examine if the referred transaction answers to all the descriptions noted above

and shall then decide as to what order is required to be passed, for avoidance

of the impugned transaction or otherwise.

28.3. In  our  view,  looking  to  the  legal  fictions  created  by  Section  43  and

looking to the duties and responsibilities of the resolution professional and the

Adjudicating  Authority,  ordinarily  an  adherence  to  the  process  illustrated

hereinabove shall ensure reasonable clarity and less confusion; and would aid

in optimum utilization of time in any insolvency resolution process.

Other  aspects  of  the  application  made  by  IRP  –  allegations  of transactions being undervalued and fraudulent  

29. Having found that the transactions in question cannot be countenanced,

for being of preference during a relevant time to a related party; and having

approved the order  passed by NCLT in  that  regard,  we do not  consider  it

necessary to deal with the other length of arguments advanced by the learned

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counsel  for  parties  on  the  questions  as  to  whether  the  transactions  are

undervalued and/or fraudulent too. In the totality of circumstances, we would

prefer leaving the said questions at that only, while also leaving all the related

questions of law open; to be examined in an appropriate case.

29.1. However,  we  are  impelled  to  make  one  comment  as  regards  the

application made by IRP. It is noticed that in the present case, the IRP moved

one composite application purportedly under Sections 43, 45 and 66 of the

Code while alleging that the transactions in question were preferential as also

undervalued and fraudulent.   In  our  view,  in  the scheme of  the Code,  the

parameters and the requisite enquiries as also the consequences in relation to

these  aspects  are  different  and  such  difference  is  explicit  in  the  related

provisions.  As noticed, the question of intent is not involved in Section 43 and

by virtue of legal fiction, upon existence of the given ingredients, a transaction

is deemed to be of giving preference at a relevant time. However, whether a

transaction is undervalued requires a different enquiry as per Sections 45 and

46 of the Code and significantly, such application can also be made by the

creditor under Section 47 of the Code. The consequences of undervaluation

are  contained  in  Sections  48  and  49.  Per  Section  49,  if  the  undervalued

transaction  is  referable  to  sub-section  (2)  of  Section  45,  the  Adjudicating

Authority  may look at  the  intent  to  examine if  such undervaluation was to

defraud the creditors. On the other hand, the provisions of Section 66 related

to fraudulent trading and wrongful trading entail the liabilities on the persons

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responsible therefor. We are not elaborating on all these aspects for being not

necessary as the transactions in question are already held preferential  and

hence, the order for their avoidance is required to be approved; but it appears

expedient to observe that the arena and scope of the requisite enquiries, to

find if the transaction is undervalued or is intended to defraud the creditors or

had been of wrongful/fraudulent trading are entirely different. Specific material

facts are required to be pleaded if a transaction is sought to be brought under

the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the

Code.  As  noticed,  the  scope  of  enquiry  in  relation  to  the  questions  as  to

whether a transaction is of  giving preference at  a relevant  time,  is  entirely

different. Hence, it would be expected of any resolution professional to keep

such requirements in view while making a motion to the Adjudicating Authority.

29.2. In the present case, it is noticed that NCLT in its detailed and considered

order essentially dealt with the features of the transaction in question being

preferential  at  a relevant  time but  recorded combined findings on all  these

three aspects that the impugned transactions were preferential, undervalued

and fraudulent. Appropriate it would have been to deal with all these aspects

separately and distinctively.

29.3. We are conscious of the fact that IBC is comparatively a new legislation

and various aspects expected therein are in the progression of taking proper

shape, particularly in the adjudicatory processes envisaged.  Having said so,

we would leave this aspect at that only, while expecting all the concerned to be

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more  attentive  to  the  scheme,  object  and  requirements  of  the  provisions

contained in the Code.

SECOND  ISSUE:  WHETHER  LENDERS  OF  JAL  COULD  BE

CATEGORISED AS FINANCIAL CREDITORS OF JIL  

Preliminary and background

30. The  discussion  and  summation  in  the  foregoing  paragraphs  and

conclusion on the first  issue itself  would  have been the end of  the matter

because the transactions in question stand disapproved as being preferential.

However,  there remains  another  significant  issue to  be adjudicated  herein,

which, though not adverted to by NCLAT, is indeed involved in these matters.  

30.1. The issue is as to whether the lenders of JAL could be categorised as

financial creditors of JIL for the purpose of IBC?  

31. The issue aforesaid was raised before NCLT by two of the respondent

banks namely, ICICI Bank Limited and Axis Bank Limited by way of separate

applications under Section 60(5) of the Code, seeking to question the decision

of  IRP rejecting  their  claims to  be  recognized as financial  creditors  of  the

corporate  debtor  JIL on  account  of  the  securities  provided  by  JIL for  the

facilities granted to JAL. The NCLT rejected the applications so filed, by way of

its orders dated 09.05.2018 and 15.05.2018 respectively, while concluding that

on  the  strength  of  the  mortgages  created  by  the  corporate  debtor  JIL,  as

collateral  security  of  the  debts  of  its  holding  company  JAL,  the  applicants

cannot be treated as financial creditors of the corporate debtor JIL.   

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31.1. The  aforesaid  orders  dated  09.05.2018  and  15.05.2018  were

questioned before NCLAT by the said lenders of JAL in Comp. App (AT) (Ins)

No.  353 of  2018 and Comp.  App (AT)  (Ins)  No.  301 of  2018 respectively.

These appeals formed part of the bunch of appeals decided by NCLAT by way

of the impugned common order dated 01.08.2019 and, as per the final result

recorded therein, these two appeals also stand allowed. However, fact of the

matter remains that nothing has been discussed by NCLAT in the impugned

order dated 01.08.2019 as regards the subject-matter of these two appeals

i.e., as to whether the said lenders of JAL could be categorised as financial

creditors of JIL or not; and the entire discussion in the impugned order and the

final conclusion therein had only been in relation to the order dated 16.05.2018

that was passed by NCLT on the application for avoidance filed by IRP.   

31.2. The appellant of Civil Appeal D. No. 32881 of 2019, IIFCL, apart from

raising  other  contentions,  has  also  questioned  this  aspect  of  the  order

impugned that the aforesaid two appeals, involving the issue as to whether the

mortgagees of the corporate debtor could be taken as financial creditors, have

been  allowed  by  NCLAT  without  recording  any  findings  and  without  any

discussion in that regard.  

31.3. Though,  ordinarily,  such  omission  in  the  impugned  order  dated

01.08.2019 might have resulted in the matter being remitted to the Appellate

Tribunal  for  appropriate  consideration  and finding  but,  as  aforesaid,  in  the

entire process, adherence to the time limit is also of significance; and in view

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of  the  fact  that  learned  counsel  for  the  respective  parties  have  advanced

elaborate submissions on the merits of the issue as to whether such lenders of

JAL could be treated as financial  creditors of  the corporate debtor  JIL and

have invited the decision of this Court, we deem it just, proper and expedient

to finally decide the relevant questions in this regard.   

31.4. We may, of course, reiterate that in view of the conclusion that we have

reached  in  relation  to  the  principal  issue,  the  transactions  in  question  are

denuded of their value and worth, per the force of the order by NCLT under

Section 44 of the Code, which has been approved by us. To be more specific,

the security interests created by the corporate debtor JIL over the properties in

question stand discharged in whole. Therefore, the respondent-lenders cannot

claim any status as creditors of the corporate debtor JIL and there could arise

no question of their making any claim to be treated as financial creditors as

such.  However,  for  its  relevance,  we deem it  appropriate  to  determine the

issue as to whether the lenders of JAL, because of creation of the mortgages

in question, could be treated as financial creditors of JIL, independent of the

finding that the transactions in question are hit by Section 43 of the Code.

32. Before  proceeding  further,  apposite  it  would  be  to  take  note  of  the

reasons assigned by NCLT in its impugned orders for rejecting the claim of two

of the lender banks to be treated as financial creditors of JIL.

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Reasoning and Findings of NCLT  

33. The  Adjudicating  Authority,  NCLT,  in  its  order  dated  09.05.2018  as

passed on the application moved by ICICI Bank Limited, with reference to the

nature of transaction in question, whereby JIL had extended collateral security

towards the facility extended to its holding company JAL as also with reference

to  the  definition  and  connotations  of  the  expressions  ‘financial  debt’  and

‘financial  creditor’ as occurring in IBC, essentially proceeded to find that in

such a transaction, as regards the corporate debtor JIL, no consideration for

time value for money was involved; and hence, the transaction in question did

not qualify as ‘financial debt’  qua the corporate debtor JIL. The NCLT,  inter

alia, observed as under:-  

“9. In the present case undisputedly corporate debtor has mortgaged its property for creating collateral security for the debt of its holding company JAL. The Corporate debtor is not a borrower, it has created a mortgage in favour of  financial  institutions for creating collateral security for the money borrowed by its holding company JAL. In the said transaction time value of money is not involved. The corporate debtor’s  liability  is  not  regarding  the  debt  owed  by  its  holding company JAL. In case of default in making payment by the principal borrower,  for  which  security  interest  has  been  created  by  the corporate debtor by mortgaging its property in favour of  Applicant bank,  the  debt  amount  can  be  realized  from  the  sale  of  the mortgaged property but not from the corporate debtor, i.e. Jaypee Infratech Ltd.  *** *** ***

9.2 In this case, the applicant has not disbursed the debt along with interest against the consideration for the time value of money. It is also  not  the  case  of  the  applicant  that  the  corporate  debtor  has borrowed money against payment of interest from the applicant.  It is also not the case that the corporate debtor has raised any amount from the applicant under any credit facility.  It is not the case of the

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applicant that there is any liability towards the corporate debtor in respect of any lease or higher purchase contract. It is further not the case of an applicant that any receivables been sold or discounted. It is further not the case of the applicant that any amount has been raised for the corporate debtor under any other transaction having the commercial effect of borrowing to the corporate debtor. It is not the case of the applicant that any derivative transaction has been entered  with  the  corporate  debtor.  It  is  also  not  the  case  of  the applicant  that  any  counter  indemnity  obligation  in  respect  of  a guarantee,  indemnity,  bond,  documentary,  letter  of  credit  or  any other instrument issued by a bank or a financial institution for the corporate debtor. Further, no amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to above has been issued by the corporate debtor.”

33.1. The NCLT also distinguished the decision of this Court in the case of

Rajkumari  Kaushalya Devi  v.  Bawa Pritam Singh & Anr.:  AIR 1960 SC

1030, as relied upon by the learned counsel for the applicant, while pointing

out  the  distinct  context  of  the  said  decision  and  while  observing  that  the

connotations of the expressions ‘debt’, ‘financial debt’, ‘financial creditor’ and

‘creditor’ in the present context would be limited to the definitions given in the

Code. The NCLT further distinguished the decision of Gujarat High Court in the

case of State Bank of India v. Smt. Kusum Vallabhdas Thakkar: 1991 SCC

Online Guj 14, while again pointing out that in the present case, the corporate

debtor has created a mortgage of its property in favour of third party without

any consideration for time value of money.  33.2. Yet further,  the NCLT rejected the contentions that  the transaction in

question could be termed as either ‘guarantee’ or ‘indemnity’ while observing,

inter alia, as under:-

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“13. The contention of the applicant that mortgage created by the corporate  debtor  can  be  termed  as  either  a  guarantee  or indemnity  is  not  tenable.  In  terms  of  the  mortgage  deeds  the corporate  debtor  has  created  a  mortgage  over  its  immovable properties,  which is either money borrowed against  payment of interest nor indemnity or a guarantee as claimed by the applicant and therefore, the same does not fall within the definition of the financial debt in terms of Sec. 5 (8) of IBC. It is stated that the corporate  debtor  has  neither  issued  any  guarantee  nor  has provided an indemnity to the applicant in respect of the financial assistance granted to JAL. 14. The  Resolution  Professional  further  submitted  that  the mortgage deed shows that the corporate debtor has only agreed to  create  a  mortgage  in  favour  of  the  applicant  towards  the financial assistance granted to its holding company, i.e. JAL. On perusal  of  mortgage  it  is  clear  that  the  corporate  debtor  has neither given any guarantee to repay or any indemnity qua the repayment  of  the  loans  granted  by  the  applicant  to  JAL.  The definition of Mortgage Debt as per the mortgage deed dated 7 th

March 2017 is as under : - “Mortgage  debt  shall  mean  the  principal  amount  of  the facility, all interest therein additional interest, default interest, liquidated  damages,  fees,  costs,  charges,  expenses,  any other amounts due and payable to secured parties under the transaction  documents,  premia  on  prepayment,  costs, charges,  and  expenses  and  other  monies  whatsoever stipulated  in  or  payable  together  with  other  debts  and liabilities  of  JAL to  lender  under  the transaction document and/or these presents.”

It is important to point out that sec. 124 of the Indian Contract Act defines a “Contract of Indemnity” as being a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person.  In  the  instant  case,  as  per  the  Mortgage  deed  the repayment obligation of the loan granted to JAL by the applicant is upon JAL as stated above and therefore, no contract of indemnity as claimed by the applicant has been entered even by conduct of the corporate debtor, and therefore, the contention of the applicant that the applicant is a financial creditor of the corporate debtor is completely untenable in law.”

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33.3. While observing that in the scheme of the Code and CIRP Regulations

thereunder, the claims are invited from the creditors of the corporate debtor

i.e., financial creditors, operational creditors and other creditors, and not from

any person or creditors of the holding company of the corporate debtor; and

while further observing that  the resolution professional  had righty observed

that the mortgages in questions were not like guarantee or indemnity, NCLT

observed that the basic ingredient of financial debt i.e., ‘debt alongwith interest

disbursed  against  time  value  of  money’  was  lacking  in  the  impugned

transactions.  NCLT  also  referred  to  the  interpretation  of  the  expression

‘financial creditors’ by NCLAT in the case of Nikhil Mehta and Sons v. AMR

Infrastructure Ltd. Company: Appeal (AT) (Insolvency) No. 07 of 2017 and

endorsed the decision of IRP while holding that,- “15.  ….On  the  above  basis,  we  are  of  the  view  that  The Resolution  Professional  has  correctly  rejected  the  claim of  the applicant  on  the  ground  that  the  Applicant  is  not  a  financial creditor of the corporate debtor concerning the Mortgages and the Mortgaged Debt. The resolution professional has rightly observed that  guarantee and indemnity  are distinct  documents under the relevant laws and the mortgages executed by the corporate debtor are not like guarantee and indemnity. The basic ingredient of the financial debt as defined under the Code is that debt along with interest  disbursed  against  time  value  of  money  lacks  in  the impugned transaction….”

33.4. Accordingly, NCLT rejected the application of ICICI Bank Limited by way

of its order dated 09.05.2018, while concluding as under:-  

“…Therefore, by the mortgage created by the corporate debtor, as collateral  security  by  the  debt  of  its  holding  company,  i.e. Jaiprakash Associates Ltd. (“JAL”) in favour of the Applicant i.e.

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ICICI Bank, the applicant cannot be treated as Financial Creditor of  the  Corporate  Debtor.  Therefore  in  our  view,  Resolution Professional has rightly rejected the claim of the applicant, which was filed by the Applicant in the capacity of Financial Creditors of the corporate debtor, i.e. Jaypee Infratech Ltd. (“JIL”)”.

33.4.1. Thereafter,  the  other  application  filed  by  Axis  Bank  Limited  was

rejected  by  NCLT  on  15.05.2018,  while  following  the  earlier  order  dated

09.05.2018.  

34. As  noticed,  the  aforesaid  orders  dated  09.05.2018  and  15.05.2018

were questioned in two appeals before NCLAT by the said lenders of JAL; and

the  said  appeals  stand  allowed  in  the  impugned  order  dated  01.08.2019

without any discussion as regards the issue involved therein. We have heard

learned counsel for the parties at length in relation to this issue too, and, in the

circumstances of the case, as noticed, we had indicated  prima facie view in

the order dated 10.12.201945, that such lenders of JAL cannot be categorised

as financial creditors of JIL and had stayed the operation of impugned order to

that extent.

Rival submissions

35. Having noticed the relevant background, we may now take note of the

contentions of  learned counsel  for  the parties in regard to the issue under

consideration.  

45 Reproduced in paragraph 7 hereinbefore.

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Submissions on behalf of the appellant

36. It has essentially been argued on behalf of the appellant IIFCL that as

per sub-section (7) of Section 5 of the Code, only such creditor could be the

‘financial creditor’ of the corporate debtor to whom a ‘financial debt’ is owed by

the corporate debtor; and, as per sub-section (8) of Section 5 of the Code, the

key requirement of a financial debt is ‘disbursal against the consideration for

the time value of money’, which includes the events or modes of disbursement

as enumerated in sub-clauses (a) to (i) of Section 5(8). It is submitted that in

the present case, the lenders of JAL having not disbursed any debt against the

consideration for  the time value of  money to  the corporate debtor  JIL,  the

corporate debtor does not owe any ‘financial debt’ to such lenders; and the

transactions in question do not fall within the brackets of ‘financial debt’ only

for the reason that the corporate debtor JIL created mortgages as collateral

security in favour of lender banks for the money borrowed by JAL. Concisely

put, the submission is that in the said mortgage transactions, disbursal against

the consideration for the time value of money  qua the corporate debtor JIL

being not involved, the lenders of JAL are not the ‘financial creditors’ of JIL and

cannot be included in the Committee of Creditors46, as to be constituted per

Section 21 of the Code.  

36.1. It  is  further  submitted  that  the  said  lenders  of  JAL have  no  right  to

demand the mortgage money from the corporate debtor nor is the corporate

46 ‘CoC’ for short

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debtor JIL under any liability to pay the same; and mere holding of security

interest, which too had not been extended for direct disbursement of any credit

to JIL, cannot make the JAL lenders as financial creditors of JIL within the

meaning  of  IBC.  Learned  counsel  for  the  appellant  has  referred  to  the

judgment and order dated 22.12.2017 by the NCLAT in Dr. B.V.S. Lakshmi v.

Geometrix Laser Solutions (P) Ltd.: Company Appeal (AT) (Insolvency)

No. 38 of 2017, to substantiate this submission.

36.2. It is contended on behalf of the appellant that though the definition of

‘financial debt’ extends to include various types of transactions, yet it does not

include a mortgage, as could be gathered from a plain and simple reading of

the  said  provision.  The counsel  for  the  appellant  has further  relied  on  the

judgment  of  this  Court  in  Swiss  Ribbons (supra), wherein  the  concept  of

‘financial creditor’ has been explicated to mean and include a person who has

direct  engagement  in  the  functioning  of  corporate  debtor  right  from  the

beginning, while assessing the viability of corporate debtor; and who would

also engage in restructuring of debts and reorganising the corporate business

in case of financial stress. With reference to the case at hand, it is submitted

that mere holding of security interest, not meant for direct disbursement of any

credit  to  corporate  debtor  JIL,  cannot  convert  the  lenders  of  JAL into  the

financial creditors of JIL.  

36.2.1. It is also contended that the respondents, the lenders of JAL to whom

mortgages  were  extended  by  the  corporate  debtor  JIL,  could  at  best  be

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construed as plain creditors, who are entitled to file Form F and to specify their

security in column 8 thereof; and in any case, they cannot become financial

creditors of JIL.

36.2.2. It is further contended that a secured creditor under the Code can be a

financial  creditor  under  two  circumstances  i.e.,  (i)  when  corporate  debtor

directly avails a debt from the creditor and such a debt is a secured debt; and

(ii) if corporate debtor furnishes a guarantee to any person. Learned counsel

for the appellant submits that a mortgagee, who has not disbursed any debt to

the corporate debtor,  may be a secured creditor  because of  the corporate

debtor creating a security to secure the payment of a third party but cannot be

a financial creditor of the corporate debtor within the meaning of Section 5(8)

of the Code.  

36.3. Elaborating on the submissions relating to the nature of transactions,

learned counsel for the appellant has strenuously argued that ‘mortgage’ is not

included within the framework of Section 5(8) of the Code and its sub-clauses

(a) to (i); and that ‘financial debt’ is limited only to the transactions enumerated

thereunder  and  its  coverage  cannot  be  enlarged  while  interpreting  the

provision.  It  is  also  argued  that  ‘mortgage’  cannot  be  deemed  to  mean

‘guarantee’, for a mortgagor has no intentions to undertake to discharge the

liability of a third person in case of his default in repayment of debts. In other

words, only where the debtor and the mortgagor are the same person that the

mortgagor would be liable to pay his debts and else, the mortgage itself does

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not create a pecuniary liability. Moreover, in the present case, when there is a

tri-partite  contract  wherein,  the  mortgagor  and  debtor  are  different,  the

impugned transactions do not  satisfy  the ingredients of  Section 126 of  the

Contract Act, as JIL has not undertaken specifically to discharge the liability of

JAL nor has entered into a ‘contract of guarantee’ with the lenders of JAL nor

has provided any indemnity;  and therefore,  the corporate debtor  JIL is  not

bound  by  any  liabilities  and  obligations  incurred  by  JAL.  To  support  the

contention  that  liability  always  flows  from  debt  and  not  from  the  security

created under the mortgage, learned counsel for the appellant has also relied

on several decisions including that in Ramchand Sur v. Ishwar Chandra Giri:

61 Ind Cases 539.

36.4. It  is submitted that a general  reference to the transaction documents

would not be sufficient to fasten liability for JIL to pay any outstanding debt of

JAL because any payment obligation has to be unequivocal and ought to be of

specific undertaking to discharge such obligations; and that general words of

incorporation or general covenant in some mortgage deeds cannot bind JIL to

all the terms and conditions of the documents, particularly any liability to incur

JAL’s indebtedness by fastening payment obligations. It is further submitted

that when the intention of parties is ascertained with reference to the terms of

documents  and  all  the  surrounding  factors,  it  cannot  be  inferred  that  JIL

undertook the liability to discharge the indebtedness of JAL when it was itself

reeling  under  financial  stress,  was  declared  NPA  and  had  surmounting

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liabilities  towards  home buyers  and its  own lenders.  With  reference to  the

financial  statements of  JIL,  it  is  pointed out  that  therein,  it  was specifically

disclosed that the mortgages had been provided as a security for the financial

assistance availed by JAL but such mortgages were not declared either as

contingent  or  as  direct  liability.  It  is  also  submitted  that  the  common loan

agreement  between  JIL and  its  lenders,  including  the  appellant,  contained

negative covenants prohibiting JIL from creating, assuming or incurring any

additional  indebtedness  or  from encumbering  any  property  or  creating  any

security on the assets of JIL. The sum and substance of such submissions had

been that the corporate debtor JIL could have neither incurred a liability to

discharge the indebtedness of JAL nor it had done so under the mortgages in

question.  

36.5. As regards the decision of  this  Court  in  Committee of Creditors of

Essar Steel India Limited through Authorised Signatory v. Satish Kumar

Gupta : 2019 SCC OnLine SC 147847,  as relied upon by the respondents,

learned counsel for the appellant has submitted that the generalised assertion

on the  part  of  the  respondents,  that  per  the  force  of  the  said  decision,  a

secured  creditor  ipso  facto becomes  financial  creditor,  is  not  a  correct

appreciation of the ratio thereof. It is submitted that in the scheme of the Code,

a secured creditor could also be a financial creditor under two circumstances:

First, when the corporate debtor directly avails a debt from the creditor and

47  Hereinafter also referred to as the case of ‘Essar Steel’.

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such debt  is secured by a security interest  like in the form of  a charge or

mortgage or hypothecation; and such a creditor, the secured one, is regarded

as financial creditor because of direct disbursement of debt to the corporate

debtor; and secondly, when the corporate debtor furnishes guarantee to any

person, such person would also become a financial creditor and a secured

creditor by virtue of sub-clause (i) of Section 5(8) of the Code, of course, such

guarantee  may  even  be  to  secure  the  debt  obligation  of  a  third  party.

However,  according  to  the  counsel  for  the  appellant,  when  the  corporate

debtor creates mortgage to secure payment obligation of a third party, without

disbursement of any debt to itself (the corporate debtor), the mortgagee, even

if becoming a secured creditor because of creation of  mortgage, could only be

described as  ‘indirect  secured creditor’ and  cannot  be  treated  as a  ‘direct

secured creditor’ so as to become a ‘financial creditor’ because, the mortgage

transaction is not envisaged to be a ‘financial debt’ in Section 5(8) with its sub-

clauses (a) to (i).   

36.5.1. It is submitted that  Essar Steel  judgment envisages the position and

priorities  of  secured creditors,  mainly  in  the context  of  a  creditor  who has

disbursed direct debt to the corporate debtor and has secured its debt by a

security  interest,  who should  have priority  over  unsecured creditors  of  the

corporate  debtor.  However,  the  said  decision,  according  to  the  learned

counsel, cannot be read to the effect that even the indirect secured creditor be

also necessarily construed as financial creditor. It is submitted that the crux of

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the said decision is that creditors not similarly situated cannot be at par; that

the arrangements of the corporate debtor with its creditors must be taken into

consideration; and that the aim of equitable treatment is based on the notion

that creditors with similar legal rights should be treated evenly while receiving

distribution  in  accordance  with  their  relative  ranking  and  interest.  It  is

submitted that  Essar Steel  cannot be read as laying down the law that even

the lenders of third party, who hold mortgages from the corporate debtor, be

also  treated  as  such  secured  creditors  who  would  fall  within  the  sect  of

‘financial creditors’.

36.6. Learned counsel for the appellant would further submit that existence of

a  security  interest  is  not  relevant  while  construing  whether  a  creditor  is

financial  creditor  or  not  because,  in  the  composition  of  CoC,  even a  non-

secured creditor could also be a financial creditor, if the ingredients of Section

5(8)  of  the Code are satisfied.  It  is  also argued that  the financial  facilities

availed  by  JAL  from  the  respondents  were  not  utilized  for  any  business

operation of JIL and hence, the respondents cannot be construed as financial

creditors of JIL.  

Submissions on behalf of respondents

37. Learned counsel for the contesting respondents have made elaborate

submissions in support  of  the counter-assertion that on account of  security

provided by the corporate debtor  JIL,  the respective lenders have become

financial creditors of JIL for the purpose of proceedings under the Code. We

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may briefly summarise the principal facets of the contentions urged on behalf

of the main contesting respondents in this regard as infra.

Axis Bank

37.1. It  has been strenuously argued on behalf  of  this respondent that the

nature and character of a ‘mortgage’ is such that it secures a debt; and in the

present case, the mortgage in question, as made by JIL, had been to secure

the debt obligations of its holding company JAL.  With reference to Section 58

of the Transfer of Property Act and the decision of this Court in Prithvi Nath

Singh & Ors. v. Suraj Ahir & Ors. : (1963) 3 SCR 302 as also the decision of

Mysore High Court in Dassappa & Ors v. Jogaiah & Ors : (1964) ILR 545, it

is  submitted  that  the  purpose  of  ‘mortgage’ is  to  secure  a  debt;  and  with

reference to the decision in  Manik Chand Raut v. Baldeo Chaudhary & Ors:

(1949)  SCCOnline Pat 64,  it  is  also contended that  mortgage,  by its  very

nature, presupposes existence of a debt and the transaction by which a debt is

extinguished is  not  a  mortgage but  a  sale.   Further,  with  reference to  the

aforementioned decision of this Court in case of Rajkumari Kaushalya Devi

v.  Bawa Pritam Singh & Anr:  AIR 1960 SC 1030,  it  is  contended that  a

mortgage  debt  creates  pecuniary  liability  upon  the  mortgagor;  and  that  a

mortgagor who transfers an interest in immovable property so as to secure a

debt,  incurs a mortgage debt.  With reference to the decision of  Delhi  High

Court in the case of State Bank of India v. Samneel Engineering Co. & Ors:

1995 (35) DRJ 485, it is further submitted that a mortgage is both a promise by

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a debtor to repay the loan as well as a real property right; of course, the right

being  intended  to  secure  the  due  payment  of  the  debt;  and  a  suit  on  a

mortgage is essentially a suit for recovery of a debt.   

37.1.1. With reference to principles aforesaid, it is contended that a mortgage

debt is a ‘debt’ within the meaning of Section 3(11) of the Code; that a debt

can be  classified  to  be  a  debt  due from ‘any  person’ and not  necessarily

restricted to the borrower alone. The aforementioned decision of Gujarat High

Court  in  State Bank of  India v.  Smt.  Kusum Vallabhdas Thakkar:  1991

SCCOnline  GUJ  14  has  again  been  referred  to  submit  that  Indian  Law

recognizes  that  a  person,  other  than  the  borrower,  can  also  execute  a

mortgage to secure the debt of the borrower. In this context, learned counsel

for the respondent has also relied upon the provisions contained in Section

126  of  the  Contract  Act,  to  contend  that  JIL  stands  in  the  position  of  a

guarantor for the debts owed by JAL. The learned counsel has also referred to

an order dated 13.03.2019 in M.A. No. 1584/2019 in CP No. 402 of 2018 as

passed by NCLT (Mumbai Bench) in the case of SREI Infrastructure Finance

Limited v. Sterling International  Enterprises Ltd.,  wherein it is held that a

third  party  mortgagor,  who  mortgages  the  property  to  secure  the  financial

obligation  of  another  party,  stands  in  the  position  of  a  guarantor;  and  the

mortgagee is a financial creditor of the third party mortgagor. In the case at

hand,  it  is  submitted,  the  corporate  debtor  JIL stands  in  the  position  of  a

guarantor with respect to the security provided to this respondent and hence,

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the  impugned  mortgage  transactions  are  covered  within  the  meaning  of

Section 5(8)(i) of the Code.

37.1.2. It is also submitted that looking to the nature of transaction in question,

the question whether JAL has defaulted on repayment and consequently, the

security is to be invoked is irrelevant for the purposes of the issue at hand; and

whether JAL committed default  or not is not decisive of the question as to

whether the mortgage debt in question is financial debt or not.  

37.1.3. It  is  further  submitted  that  in  the  present  case,  the  mortgage

transactions were executed to secure the payment of debts/liabilities of JAL;

and  that  such  creation  of  mortgage  undoubtedly  is  a  ‘security  interest’  as

defined in Section 3(31) of the Code inasmuch as, a security interest includes

any creation of right/title/interest/claim in property for the purpose of securing

the payment or performance of an obligation; and also includes a mortgage.

Hence it  is contended that the respondent bank comes within the ambit  of

‘secured creditor’ per Section 3(30) of the Code.

37.1.4. It  is  emphasised  by  learned  counsel  for  this  respondent  that  a

mortgage debt constitutes a ‘financial debt’ within the meaning of Section 5(8)

of the Code even if no amount is directly disbursed to the corporate debtor.

While  relying  on  the  decision  of  this  Court  in  Pioneer  Urban  Land  and

Infrastructure Ltd. & Anr.  v. Union of India & Ors.: (2019) 8 SCC 41648, it is

contended that the definition of  ‘financial  debt’ under Section 5(8)  of  Code

48 Hereinafter also referred to as the case of ‘Pioneer Urban’

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has been given an extended meaning so as to include the situations which

may  not  directly  involve  disbursal  against  the  consideration  for  time  value

money.  

37.1.5.Further,  with  reference to the aforementioned UNCITRAL Legislative

Guide on Insolvency Law and the decisions of this Court in the cases of Essar

Steel and  Swiss Ribbons, it  is submitted that  a holistic interpretation of the

Code would support the position that the respondent, being a secured creditor

and a financial creditor, should be included in CoC so as to protect its security

interest.

37.2. The submissions and contentions made on behalf  of  this  respondent

largely cover the stand of other respondents too. Hence, we may only notice,

in brief, the other or additional part of major submissions on behalf of other

respondents, while avoiding repetition.

Standard Chartered Bank

37.3. It is submitted on behalf of this respondent that the terms envisaged in

the  mortgage  deed  dated  24.05.2016  make  it  abundantly  clear  that  the

corporate debtor JIL had unequivocally promised to pay to this respondent the

debts/liabilities owed by JAL in accordance with the terms and conditions of

the  secured  financing  documents  executed  between  this  respondent  and

JAL49. Hence, it is contended that though the claim of this respondent is limited

49 Clause B & B(a) of the Mortgage Deed produced as Annexure-1 at Pg. 8-43  

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to the extent of the value of the properties mentioned in the Schedule to the

Mortgage Deed but, to that extent, it remains a financial creditor of JIL.  

37.3.1.As regards similar arguments with respect to Section 58 of the Transfer

of Property Act, that a mortgage presupposes the subsistence of a debt and

hence  it  is  a  secured  debt,  apart  from  above  referred  decisions,  learned

counsel has also referred to the decision in Pomal Khanji Govindji & Ors. v.

Brajlal Karsandas Purohit & Ors: (1989) 1 SCC 458.  

37.3.2.It  is  contended that when the objective of  the Code is to revive the

corporate debtor, the resolution plan ought to contain all  claims against the

corporate debtor, whether matured or not, so that if the liability again creeps in,

the  Company  may  be  prevented  from  being  dragged  into  insolvency  or

liquidation  proceedings.  It  is  further  submitted that  this  respondent,  who is

holding public  money, ought to be a part  of  CoC; and its absence in CoC

would be defeating the very object of the Code because the resolution plan

may provide for various measures which might take away the security interest

created in favor of  this  respondent;  and without  its  participation,  the entire

process would be prejudicial to the interest of this respondent. It is submitted

that as per the ratio in  K. Sashidhar v. Indian Overseas Bank and Ors. :

2019 SCC OnLine SC 257 read with the decision in the case of Essar Steel,

once  a  resolution  plan  is  approved by  the  wisdom of  the  CoC,  the  same

cannot be challenged and looking to the scheme of the Code, presence of the

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mortgagees like this respondent in the CoC of JIL is necessary and is rather

unavoidable.

ICICI Bank

37.4. On behalf of this respondent, it is maintained that in view of Section 5(8)

(i) read with Section 5(8)(a) of the Code, the creation of impugned mortgage

had resulted in creation of a ‘financial debt’ as defined under the Code, for the

transaction being akin to that of a ‘guarantee’ as defined under Section 126 of

the Contract Act. Again, with reference to the decision in Smt. Kusum (supra),

it is submitted that even a third party mortgage leads to creation of an implied

guarantee with an obligation to pay the mortgage debt. In other words, since

the definition of ‘financial debt’ is not exhaustive, any transaction which is akin

to creation of a guarantee would come under the purview of the definition of

‘financial debt’ and as such, the mortgage provided by the corporate debtor

JIL,  being akin to the guarantee, would be squarely within the definition of

‘financial  debt’.  It  is  further  submitted  that  in  the  given  scenario,  this

respondent takes on the role of a ‘financial creditor’ of the corporate debtor JIL

within  the meaning of  Section 5(8)(i)  of  the Code and hence,  ought  to  be

admitted as a member of the CoC.  

37.4.1.It is submitted on behalf of this respondent that on a holistic reading of

the mortgage deeds, it  is clear that ‘exclusive mortgages’ were executed in

favour of this respondent with express clauses whereby, the corporate debtor

JIL had undertaken to either discharge the debt or to ensure repayment of

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facilities extended to JAL and in the event of  default,  this respondent shall

have  the  right  to  sell  the  mortgaged  properties.  Such  stipulations,  it  is

contended, clearly put the respondent in the category of ‘financial creditors’.

37.4.2.With reference  to the duties of IRP as laid out in the Code, and with

analysis of the definition of ‘claim’ as found in Section 3(6) of the Code, it is

submitted  that  the  definition  of  ‘claim’  is  wide  enough  to  include  all

stakeholders of the corporate debtor, even if a claim had not matured on the

date  of  insolvency  commencement.  The  Report  of  Banking Law Reform

Committee has also been referred in this regard.  

37.4.3.It is further submitted that Regulations 12, 13 and 14 of the Insolvency

and Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons)  Regulations,  2016  require  the  IRP to  admit  all  claims,  including

contingent  claims,  as  on  the  insolvency  commencement  date;  that  as  per

Section 29 of the Code, the IRP ought to prepare an information memorandum

for  formulating  a  resolution  plan;  that  as  per  Regulation  37  of  CIRP

Regulations, the insolvency resolution of the corporate debtor should include

sale of all  or part of the assets, irrespective of whether they are subject to

security interest and satisfaction or modification of any security interest; and

that  sub-section  (4)  of  Section  30  of  the  Insolvency  and  Bankruptcy

(Amendment) Act, 2019 clarifies that priority of secured creditors has to be

considered. With reference to the processes so envisaged by the Code, it is

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contended that the secured creditors like the respondent cannot be kept away

from the class of financial creditors.

Central Bank of India

37.5. Apart from the submissions carrying essentially the substance as above-

noted,  it  is  also  contended that  this  respondent,  being  a  secured creditor,

would be entitled to enforce its  security  interest  in  the mortgaged property

upon vacation of the order of moratorium in terms of the Securitisation and

Reconstruction Of Financial Assets and Enforcement of Security Interest Act,

200250; and that the resolution plan, without including the secured creditors,

would be unenforceable, as the secured creditors will then seek enforcement

against  mortgage  property  under  the  SARFAESI  Act.  It  is,  therefore,

contended  that  the  secured  creditor,  like  the  respondent,  needs  to  be

recognized  as  financial  creditor,  and  thereby  a  participant  in  CoC  of  the

corporate debtor JIL.  

Bank of Maharashtra

37.6. While going in tandem with the submissions aforesaid, it is asserted on

behalf of this respondent that the corporate debtor JIL is under a pecuniary

obligation to discharge the liability in view of the Indenture of Mortgage (IOM)

dated  29.12.2016,  which  is  a  contract  of  guarantee  and,  therefore,  the

relationship  between  the  parties  cannot  be  classified  merely  as  that  of

mortgagor and mortgagee, but is also of a guarantor and guarantee which, in

50 Hereinafter also referred to as ‘the SARFAESI Act’

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turn, is covered under Section 5(8) of the Code and thereby, this respondent is

a ‘financial creditor’ within the meaning of Section 5(7) of the Code.   

Unique position of financial creditor- as explained in Swiss Ribbons

38. Having taken note of the rival contentions on the issue as to whether the

lenders  of  JAL could  be  categorised  as  ‘financial  creditors’  of  JIL for  the

purpose of CIRP in question, gist of the matter is as to whether the subject

transactions could be categorised as ‘financial  debts’ within the meaning of

Section 5(8) of the Code so as to confer the status of ‘financial creditors’ upon

the respondents, lenders of JAL.  

38.1. The expressions “financial creditor” and “financial debt” as occurring in

the  Code  have  come  up  for  consideration  before  this  Court  in  several

decisions,  including those in the above-mentioned cases of Swiss Ribbons

(decided on 25.01.2019),  Pioneer Urban (decided on 09.08.2019) and Essar

Steel (decided on 15.11.2019), which have been referred to and relied upon by

learned counsel  for  the  parties  for  one proposition  or  another.  In  fact,  the

observations as occurring in the last of the said decisions, in the case of Essar

Steel, as relied upon by the learned counsel for the respondents, are based on

those occurring in the decision in Swiss Ribbons51.

51 We have referred to the case of Swiss Ribbons in paragraph 16.1.1 hereinbefore while pointing out that in Swiss Ribbons, this Court had traversed through the historical background and scheme of the Code in the wake of challenge to the constitutional validity of various provisions of the Code and while rejecting such challenge, this Court had observed that the focus of the Code was to ensure revival and continuation of the corporate debtor, where liquidation is to be availed of only as a last resort; and that the Code was a beneficial legislation to put the corporate debtor on its feet, and not a mere recovery legislation for the creditors.  

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39.   As indicated hereinbefore, the law declared by this Court in the case of

Swiss  Ribbons,  while  rejecting  the  contentions  that  classification  between

financial creditor and operational creditor was discriminatory and violative of

Article 14, shall have some bearing on the claim of the respondent-lenders for

being treated as financial creditors of JIL. Having regard to the submissions

made, it shall now be pertinent to take note of the relevant aspects from the

said decision in requisite details.

39.1. The broad features of the expressions used in Sections 5(7) and 5(8) of

the Code in defining the terms “financial creditor”  and “financial debt” were

indicated by this Court in the case of Swiss Ribbons in the following:

“42. A perusal of the definition of “financial creditor” and “financial debt”  makes  it  clear  that  a  financial  debt  is  a  debt  together  with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any  of  the  manners  prescribed  in  Section  5(8)  or  otherwise,  as Section  5(8)  is  an  inclusive  definition.  On  the  other  hand,  an “operational debt” would include a claim in respect of the provision of goods or  services,  including employment,  or  a  debt  in  respect  of payment  of  dues  arising  under  any  law  and  payable  to  the Government or any local authority.”

39.2. The unique position assigned to a ‘financial creditor’, who plays a crucial

role in insolvency resolution process as against the role of other creditors, has

been extensively explained by this Court in the case of Swiss Ribbons, albeit

in the context of its differentiation with the category of ‘operational creditor’, in

the following:

“50. According  to  us,  it  is  clear  that  most  financial  creditors, particularly banks and financial institutions, are secured creditors  

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whereas most operational creditors are unsecured, payments for goods  and services  as  well  as  payments  to  workers  not  being secured  by  mortgaged  documents  and  the  like.  The  distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in  this  country.  Apart  from the above,  the nature of loan agreements with financial creditors is different from contracts  with  operational  creditors  for  supplying  goods  and services.  Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts  with  operational  creditors  are  relatable  to  supply  of goods  and  services  in  the  operation  of  business.  Financial contracts  generally  involve  large  sums  of  money.  By  way  of contrast,  operational  contracts  have  dues  whose  quantum  is generally less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set-up or working of business.  Also, financial creditors have  specified  repayment  schedules,  and  defaults  entitle financial  creditors to recall  a  loan in totality. Contracts  with operational creditors do not have any such stipulations. Also, the forum  in  which  dispute  resolution  takes  place  is  completely different.  Contracts  with  operational  creditors  can  and  do  have arbitration  clauses  where  dispute  resolution  is  done  privately. Operational  debts  also  tend  to  be  recurring  in  nature  and  the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice.  Goods that  are supplied may be substandard.  Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well documented and defaults made are easily verifiable.

51. Most  importantly,  financial  creditors  are,  from the  very beginning,  involved  with  assessing  the  viability  of  the corporate  debtor.  They  can,  and  therefore  do,  engage  in restructuring  of  the  loan  as  well  as  reorganisation  of  the corporate debtor’s  business when there is  financial  stress, which are things operational creditors do not and cannot do. Thus, preserving  the  corporate  debtor  as  a  going  concern,  while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia

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between the two which has a direct relation to the objects sought to be achieved by the Code.

*** *** ***  75. Since  the  financial  creditors  are  in  the  business  of moneylending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor.  Even  at  the  time  of  granting  loans,  these  banks  and financial  institutions  undertake  a  detailed  market  study  which includes  a  techno-economic  valuation  report,  evaluation  of business,  financial  projection,  etc.  Since this detailed study has already  been  undertaken  before  sanctioning  a  loan,  and  since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution  plan.  On  the  other  hand,  operational  creditors,  who provide  goods  and  services,  are  involved  only  in  recovering amounts  that  are  paid  for  such  goods  and  services,  and  are typically unable to assess viability and feasibility of business. The BLRC  Report,  already  quoted  above,  makes  this  abundantly clear.”

(emphasis supplied)

39.3. The enunciation aforementioned illuminates the reasons as to why at all

a  financial  creditor  is  conferred  with  a  major,  rather  pivotal,  role  in  the

processes contemplated by Part II of the Code. It is the financial creditor who

lends finance on a term loan or for working capital that enables the corporate

debtor to set up and/or operate its business; and who has specified repayment

schedules  with  default  consequences.  The  most  important  feature,  as  this

Court has said, is that a financial creditor is, from the very beginning, involved

in assessing the viability of the corporate debtor who can, and indeed, engage

in restructuring of the loan as well as reorganisation of the corporate debtor’s

business when there is financial stress. Hence, a financial creditor is not only

about  in terrorem clauses for repayment of dues; it has the unique parental

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and nursing roles too. In short, the financial creditor is the one whose stakes

are intrinsically inter-woven with the well-being of the corporate debtor.

Financial debt - ratio of Pioneer Urban  

40. Having imbibed the basic features associated with a ‘financial creditor’,

we need to examine as to who could at all  fall  in this category. In order to

address  this  core  question,  delving  into  the  finer  connotations  of  the

expression  “financial  debt”,  as  defined  in  Section  5(8)  of  the  Code  is,

obviously,  necessary.  As  noticed,  while  defining  ‘financial  creditor’  and

‘financial  debt’  in  Section  5(7)  and  Section  5(8)  of  the  Code,  both  the

expressions “means” and “includes” have been used. As per the definition,

while “financial creditor” means a person to whom a “financial debt” is owed, it

also  includes  a  person  to  whom such  debt  has  been  legally  assigned  or

transferred  to.  Obviously,  a  comprehension  of  this  definition  of  “financial

creditor”  cannot  be complete without  taking into  account  as  to  what  is  the

meaning assigned to the expression “financial debt”. Again, the term “financial

debt” has also been defined with the expressions “means” and “includes”.  A

“financial debt” means a debt along with interest, if  any, which is disbursed

against  the consideration  for  the time value of  money;  and it  includes  the

money borrowed or raised or protected in any of the manners prescribed in

sub-clauses (a) to (i) of Section 5(8).  

41. The  larger  parts  of  the  expressions  employed  in  the  definition  of

“financial  debt”  in  sub-section  (8)  of  Section  5  of  the  Code  with  their

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connotations were explicated in Pioneer Urban by a three-Judge Bench of this

Court; and, in view of the contentions urged, it would be appropriate to take a

deeper look into the exposition of law by this Court, while also keeping in view

the  plain  basic  principle  that  a  decision  of  the  Court  is  required  to  be

understood in the context of the facts and issues involved therein.

41.1. In  the  case  of  Pioneer Urban,  this  Court  was  concerned  with  the

challenge  to  the  constitutional  validity  of  amendments  made  to  the  Code

pursuant  to  a  report  dated  26.03.2018  prepared  by  the  Insolvency  and

Bankruptcy Law Committee. The amendments were essentially to the effect of

putting the allottees of real estate projects into the sect of ‘financial creditors’

and  thereby  investing  them  with  the  rights  and  entitlement  to  trigger  the

proceedings under Section 7 of the Code against the real estate developers

and to be represented in the Committee of Creditors. In the background of

such amendments had been certain important decisions/orders by NCLAT and

by this Court. One had been the order dated 21.07.2017 by the NCLAT in the

case  of  Nikhil  Mehta  and Sons  (HUF)   v.  AMR  Infrastructure  Limited:

(2017) SCC Online NCLAT 859,  where it was held that the amount raised by

the developers had the commercial effect of a borrowing and the allottees of

such developers were financial creditors within the meaning of Section 5(7) of

the Code. The other one had been the order dated 11.09.2017 passed by this

Court in Chitra Sharma (supra) whereby, a representative of the home buyers

was appointed to participate in the meetings of the Committee of Creditors for

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protection of their interests. Yet another order was passed by this Court on

22.11.2017, on practically the same lines, qua another group of builders in the

case of Bikram Chatterjee v. Union of India: 2019 (8) SCC 527. In the wake

of such orders, the Insolvency Committee Report suggested for amendment to

the  Code  that  ultimately  culminated  into  the  Insolvency  and  Bankruptcy

(Second Amendment) Act, 2018. The amendments were made, inter alia, with

insertion of Explanation to sub-clause (f) of Section 5(8) of the Code and with

the co-related insertion of sub-section (6A) to Section 21 as also with further

insertion  of  Section  25-A  in  the  Code.  These  amendments  were  under

challenge in Pioneer Urban. Several contentions were urged before this Court

questioning the treatment of allottees as financial creditors. In this context and

in the wake of such issues this Court dealt with the contentions related with

Section  5(8),  particularly  sub-clause  (f)  thereof.  The  relevant  part  of  the

consideration of this Court in Pioneer Urban under the heading ‘Interpretation

of  Section  5(8)(f)  of  the  Code’ needs  to  be  noticed  and is  extracted  as

under:-

“66. Section 5(8)(f) of the Code has been set out in the beginning of this judgment. What has been argued by learned counsel on behalf  of  the  petitioners  is  that Section  5(8)(  f  ),  as  it  originally stood, is an exhaustive provision which must be read noscitur a sociis,  and if  so read, sub-clause  (f)  must take colour from the other clauses of the provision, all of which show that the sine qua non of a “financial debt” is a loan of money made with or without interest, which must then be returned as money. This, according to the  learned  counsel  for  the  petitioners,  is  clear  from  even  a cursory  reading of Section 5(8).  Secondly,  according to  learned counsel for the petitioners, by no stretch of imagination, could an

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allottee under a real estate project fall within Section 5(8)(  f  ), as it originally  stood  and  the  Explanation  must  then  be  read prospectively  i.e.  only  on and from the date of  the Amendment Act.  Several sub-arguments were made on the effect of deeming fictions  generally  and  on  the  functions  of  an  explanation  to  a section. Let us address all of these arguments. *** *** *** 68. Thus, in order to be a “debt”, there ought to be a liability or obligation in respect of a “claim” which is due from any person. “Claim” then means either a right to payment or a right to payment arising  out  of  breach of  contract,  and this  claim can be  made whether  or  not  such  right  to  payment  is  reduced  to  judgment. Then comes “default”, which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor. Learned counsel for the petitioners relied upon the judgment in Union of India    v  . Raman Iron Foundry : (1974) 2 SCC 231, and, in particular relied strongly upon the sentence reading: (SCC p.243, para 11)

“11....Now the law is well settled that a claim for unliquidated damages  does  not  give  rise  to  a  debt  until  the  liability  is adjudicated and damages assessed by a decree or order of a court or other adjudicatory authority.”

69.   It is precisely to do away with judgments such as Raman Iron Foundry (supra) that “claim” is defined to mean a right to payment or a right to remedy for breach of contract  whether or not such right is reduced to judgment.  What is clear,  therefore,  is that  a debt is a liability  or obligation in respect of  a right  to payment, even if it arises out of breach of contract, which is due from any person, notwithstanding that there is no adjudication of the said breach,  followed  by  a  judgment  or  decree  or  order.  The expression  “payment”  is  again  an  expression  which  is  elastic enough to include “recompense”, and includes repayment. For this purpose, see H.P. Housing and Urban Development Authority   v. Ranjit Singh Rana : (2012) 4 SCC 505 (at paragraphs 13 and 14 therein),  where  the  Webster’s  Comprehensive  Dictionary (International Edn.) Vol. 2 and the Law Lexicon by P. Ramanatha Aiyar (2nd Edn., Reprint) are quoted.

70. The definition of “financial debt” in Section 5(8) then goes on to  state  that  a  “debt”  must  be  “disbursed”  against the consideration  for  time  value  of  money.  “Disbursement”  is defined in Black’s Law Dictionary (10th Edn.) to mean:

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“1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose.”  

71.   In  the  present  context,  it  is  clear  that  the  expression “disburse”  would  refer  to  the  payment  of  instalments  by  the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a  flat/apartment.  The  expression  “disbursed”  refers  to  money which has been paid against consideration for the “time value of money”.  In  short,  the  “disbursal”  must  be  money  and must  be against  consideration  for  the  “time  value  of  money”,  meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money. Thus far, it is clear that an allottee “disburses” money in the form of advance payments made towards construction of  the real  estate project. We were shown the  Dictionary of Banking Terms (2nd Edn.) by Thomas P. Fitch in which “time value for money” was defined thus:

“present  value:  today’s  value  of  a  payment  or  a  stream  of payment  amount  due  and  payable  at some  specified  future date,  discounted by a compound interest  rate  of  DISCOUNT RATE. Also called the time value of money. Today’s value of a stream of cash flows is worth less than the sum of the cash flows  to  be  received  or  saved  over  time.  Present  value accounting  is  widely  used  in  DISCOUNTED  CASH  FLOW analysis.”      (emphasis supplied)

That this is against consideration for the time value of money is also clear as the money that is “disbursed” is no longer with the allottee,  but,  as  has  just  been  stated,  is  with  the  real  estate developer who is legally obliged to give money’s equivalent back to the allottee, having used it in the construction of the project, and being at a discounted value so far as the allottee is concerned (in the sense of the allottee having to pay less by way of instalments than  he  would  if  he  were  to  pay  for  the  ultimate  price  of  the flat/apartment). *** *** *** 74. What is clear from what Shri Venugopal has read to us is that a wide range of transactions are subsumed by para (f) and that the precise scope of para (f) is uncertain. Equally, para (f) seems to be a “catch all” provision which is really residuary in nature, and

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which would subsume within it transactions which do not, in fact, fall under any of the other sub-clauses of Section 5(8).

75. And now to the precise language of Section 5(8)(  f  ).  First and foremost, the sub-clause does appear to be a residuary provision which is “catch all” in nature. This is clear from the words “any amount” and “any other transaction” which means that amounts that are “raised” under “transactions” not covered by any of the other clauses, would amount to a financial  debt if  they had the commercial effect of a borrowing. The expression “transaction” is defined by Section 3(33) of the Code as follows:

3.(33) “transaction” includes an agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor;

As correctly argued by the learned Additional  Solicitor General, the  expression  “any  other  transaction”  would  include an arrangement in writing for the transfer of funds to the corporate debtor  and  would  thus  clearly  include  the  kind  of  financing arrangement by allottees to real estate developers when they pay instalments  at  various  stages  of  construction,  so  that  they themselves then fund the project either partially or completely.

76. Sub-clause (f) Section 5(8) thus read would subsume within it amounts raised under transactions which are not necessarily loan transactions,  so  long  as  they  have  the  commercial  effect  of  a borrowing.  We  were  referred  to  Collins  English  Dictionary  & Thesaurus (2nd Edn.,  2000) for the meaning of  the expression “borrow” and the meaning of the expression “commercial”. They are set out hereinbelow:

“borrow-vb 1. to obtain or receive (something, such as money) on loan for temporary use,  intending to give it,  or  something equivalent back to the lender. 2. to adopt (ideas, words, etc.) from another source; appropriate. 3. Not standard. to lend. 4. (intr) Golf. To putt the ball uphill of the direct path to the hole: make sure you borrow enough.”  

*** *** ***

“commercial. -adj. 1. of or engaged in commerce. 2. sponsored or paid for by an advertiser:  commercial  television.  3. having profit as the main aim: commercial music. 4. (of chemicals, etc.)

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unrefined  and  produced  in  bulk  for  use  in  industry.  5.  a commercially sponsored advertisement on radio or television.”

77. A perusal of these definitions would show that even though the petitioners may be right in stating that a “borrowing” is a loan of money for temporary use, they are not necessarily right in stating that the transaction must culminate in money being given back to the lender. The expression “borrow” is wide enough to include an advance given by the homebuyers to a real estate developer for “temporary use” i.e. for use in the construction project so long as it is  intended by the agreement to give “something equivalent”  to money back to  the homebuyers.  The “something equivalent”  in these matters is obviously the flat/apartment. Also of importance is the expression “commercial effect”. “Commercial” would generally involve transactions having profit  as their main aim. Piecing the threads together, therefore, so long as an amount is “raised” under a real estate agreement, which is done with profit as the main aim, such  amount  would  be  subsumed  within Section  5(8)  (f  ) as  the sale agreement between developer and home buyer would have the “commercial effect” of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have “commercial” interests in the same – the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thus construed, there can be no difficulty in stating that the amounts raised from allottees under real  estate projects would,  in fact,  be subsumed within Section 5(8)  (f  ) even without adverting to the explanation introduced by the Amendment Act. *** *** *** 79. That this amendment is in fact clarificatory is also made clear by the Insolvency Committee Report,  which expressly uses the word “clarify”, indicating that the Insolvency Law Committee also thought  that  since  there  were  differing  judgments  and  doubts raised on whether homebuyers would or would not be included within Section 5(8)(  f),  it  was best to set these doubts at rest by explicitly  stating  that  they  would  be  so  covered  by  adding  an explanation  to Section  5(8)(  f  ).  Incidentally,  the  Insolvency  Law Committee itself  had no doubt  that  given the “financing” of  the project by the allottees, they would fall within Section 5(8)(f) of the Code as originally enacted.”

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41.1.1. It  is,  therefore,  evident  that  this  Court,  even while  interpreting  sub-

clause (f) of Section 5(8) on the question as to whether an allottee under a real

estate  project  could  fall  thereunder,  analysed  the  gamut  of  the  relevant

expressions of ‘disbursement’, ‘borrowing’ and ‘time value of money’, being the

root ingredients of ‘financial debt’ within the meaning of the Code.

41.1.2. It is significant to notice that in the case of Pioneer Urban, one line of

arguments on behalf of the petitioners, who led challenge to the amendments,

had been that the use of expression “means and includes” in Section 5(8) was

indicative that the provision was exhaustive and in that position, alien subject-

matter  such  as  home  buyers  could  not  have  been  inserted  therein.  The

decision of this Court in the case of P. Kasilingam & Ors.  v. P.S.G. College

of Technology  & Ors  : (1995) Suppl. 2 SCC 348 was relied upon by the

petitioners wherein, this Court had rejected an argument that the expression

“means and includes” indicated that the definition was inclusive in nature and

would  also  cover  the  categories  which  were  not  mentioned  therein.  In  P.

Kasilingam, this Court had said that the use of the word ‘means’ indicates that

the definition is  a  hard and fast  definition and no other  meaning could  be

assigned to the expression than is put down in the definition.  As regards the

word ‘includes’, this Court said that it enlarges the meaning of the expression

defined so as to comprehend not only such things as they signify according to

their natural import but also those things which the clause declares that they

shall include. Further, this Court said that the words 'means and includes', on

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the other hand, indicate ‘an exhaustive explanation’ of the meaning which, for

the  purposes  of  the  Act,  must  invariably  be  attached  to  these  words  or

expressions.  On  the  other  hand,  another  decision  of  this  Court  in  Krishi

Utapadan Mandi  Samiti  &  Anr  v.  M/s  Shankar  Industries  &  Ors:  1993

Suppl. (3) SCC 361 was referred on behalf of the respondents wherein, the

Court had considered a definition clause whereby the expression “agricultural

produce”  was  defined  to  mean  such  items  of  produce  of  agriculture,

horticulture, viticulture, apiculture, sericulture, pisciculture, animal husbandry,

or forest as specified in the Schedule and then, the definition included therein

admixture of two or more of such items, and further included any such item in

processed form and yet further included specific items like gur, rub, shakkar,

khandsari  and jaggery.  While  examining such definition in Krishi  Utapadan

Mandi Samiti, the Court proceeded to say that under the rules of interpretation,

when the words ‘means and includes’ are used in a definition, they are to be

given  a  wider  meaning  and  are  not  exhaustive  or  restricted  to  the  items

contained therein. This statement of law in Krishi Utapadan Mandi Samiti was

held by the three-Judge Bench of this Court in Pioneer Urban to be not that of

good law for it ignored the earlier precedents of larger and coordinate Benches

and was also out of sync with the later decisions on the same point. However,

and at the same time, the arguments on behalf of the petitioners, that sub-

clauses (a) to (i) of Section 5(8) of the Code must necessarily reflect the fact

that the financial debt could only be a debt disbursed against the consideration

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for the time value of money and which permeates sub-clauses (a) to (i), was

also not accepted as a matter of statutory interpretation while observing that

the expression “and includes”  speaks of  the subject  matter  which may not

necessarily be reflected in the main part of the definition. These observations

of  the  Court,  after  reproduction  of  the  relevant  extracts  from  the  referred

decisions, read as under:

“82. This statement of the law, as can be seen from the quotation hereinabove, is without citation of any authority. In fact, in  Jagir Singh. v. State of Bihar.: (1976) 2 SCC 942 at paras 11 and 19 to 21 and Mahalakshmi Oil Mills v. State of A.P.: (1989) 1 SCC 164, at paras 8 and 11 (which has been cited in  P. Kasilingam : 1995 Supp (2) SCC 348) this Court set out definition sections where the expression  "means"  was  followed  by  some  words,  after  which came the expression "and includes" followed by other words, just as in the Krishi Utpadan Mandi Samiti case : 1993 Supp (3) SCC 361  (2).  In  two  other  recent  judgments,  Bharat  Coop.  Bank (Mumbai) Ltd. v. Employees Union: (2007) 4 SCC 685, at paras 12 and 23 and  State of  W.B.  v.  Associated Contractors  :  (2015) 1 SCC  32  at  para  14,  this  Court  has  held  that  wherever  the expression "means" is followed by the expression "and includes" whether with or without additional words separating "means" from "includes", these expressions indicate that the definition provision is exhaustive as a matter of  statutory interpretation.  It  has also been  held  that  the  expression  "and  includes"  is  an  expression which extends the definition contained in words which follow the expression "means".  From this discussion, two things follow. Krishi Utpadan Mandi Samiti cannot be said to be good law insofar  as  its  exposition  on  "means"  and  "includes"  is concerned,  as  it  ignores  earlier  precedents  of  larger  and coordinate Benches and is out of sync with later decisions on the same point. Equally, Dr. Singhvi's  argument that clauses (a) to (i) of Section 5(8) of the Code must all necessarily reflect the fact  that  a  financial  debt  can  only  be  a  debt  which  is disbursed  against  the  consideration  for  the  time  value  of money,  and  which  permeates  clauses  (a)  to  (i),  cannot  be accepted  as  a  matter  of  statutory  interpretation,  as  the expression "and includes" speaks of subject-matters which

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may  not  necessarily  be  reflected  in  the  main  part  of  the definition.”

(emphasis supplied)

41.1.3. In  the  end,  however,  this  Court  rejected  the  contentions  urged  on

behalf of the petitioners while accepting other line of submissions on behalf of

the respondents that the legislature is not precluded by way of amendment

from inserting words into what may even be an exhaustive definition and while

observing that an exhaustive definition is exhaustive only for the purposes of

interpretation of a statute by the Courts. This Court said,-

“83. In any event, as was correctly argued by learned Additional Solicitor  General  Mrs.  Madhavi  Divan,  the  legislature  is  not precluded by way of amendment from inserting words into what may  even  be  an  exhaustive  definition.  What  is  an  exhaustive definition is exhaustive for purposes of interpretation of a statute by  the  courts,  which  cannot  bind  the  legislature  when  it  adds something to  the  statute  by  way of  amendment.  On this  score also, there is no substance in the aforesaid argument.”

41.1.4. This  Court  ultimately  found  that  the  Explanation was  added by  the

Amendment Act only to clarify the doubt that had arisen as to whether home

buyers/allottees  were  subsumed  within  Section  5(8)(f)  of  the  Code.  In

essence,  the  amendment  in  question  was  interpreted  to  be  clarificatory  in

nature so as to put beyond doubt that allottees are to be regarded as financial

creditors  within  the  enacting  part  of  Section  5(8)(f)  of  the  Code.  The

Amendment Act was upheld with this Court holding as under:

“96. In the present case, it is clear that the deeming fiction that is used  by  the  Explanation  is  to  put  beyond  doubt  the  fact  that allottees  are  to  be  regarded  as  financial  creditors  within  the enacting part contained in Section 5(8)(f) of the Code.

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97. It was also argued that an explanation does not enlarge the scope of the original section and for this purpose  S. Sundaram Pillai  :  (1985) 1 SCC 591 was relied upon.  This  very judgment recognises,  in  para  46,  that  an  explanation  does  not  ordinarily enlarge the scope of the original section. But if it does, effect must be given to the legislative intent notwithstanding the fact that the legislature has named a provision as an explanation. [See Hiralal Ratanlal v. State of U.P.: (1973) 1 SCC 216 at p. 225, followed in para 51 of Sundram Pillai]. In any case, it has been found by us that the Explanation was added by the Amendment Act only to  clarify  doubts  that  had  arisen  as  to  whether homebuyers/allottees were subsumed within Section 5(8)(f). The Explanation added to Section 5(8)(f) of the Code by the Amendment  Act  does not  in  fact  enlarge the scope of  the original section as homebuyers/allottees would be subsumed within Section 5(8)(f) as it originally stood as has been held by us  hereinabove.  As  a  matter  of  statutory  interpretation,  that interpretation,  which  accords  with  the  objects  of  the  statute  in question,  particularly  when  we  are  dealing  with  a  beneficial legislation,  is  always  the  better  interpretation  or  the  "creative interpretation" which is the modern trend of authority, and which is reflected  in  the  concurring  judgment  of  Eera  v. State  (NCT  of Delhi) : (2017) 15 SCC 133  paras 122 and 127. This argument must, therefore, also be rejected.  

98.  We,  therefore,  hold  that  allottees/homebuyers  were included in the main provision, i.e. Section 5(8)(f) with effect from the inception of the Code, the explanation being added in 2018 merely to clarify doubts that had arisen.”

(emphasis supplied)

41.1.5. For taking into comprehension the ratio of  Pioneer Urban (supra) and

for its application to the question at hand, appropriate it would be to recount

the basic principles expounded and explained by a three-Judge Bench in the

case of  Haryana Financial Corporation and Anr.  v. Jagdamba Oil Mills

and Anr.: (2002) 3 SCC 496 that the observations of the Court in a judgment

are always required to be read in the context in which they appear.  This Court

has said,-  

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“19. Courts  should  not  place  reliance  on  decisions  without discussing  as  to  how  the  factual  situation  fits  in  with  the  fact situation of the decision on which reliance is placed. Observations of courts are not to be read as Euclid’s theorems nor as provisions of the statute. These observations must be read in the context in which they appear. Judgments of courts are not to be construed as  statutes.  To  interpret  words,  phrases  and  provisions  of  a statute,  it  may  become necessary  for  Judges  to  embark  upon lengthy discussions but the discussion is meant to explain and not to  define.  Judges  interpret  statutes,  they  do  not  interpret judgments. They interpret words of statutes, their words are not to be interpreted as statutes.  In  London Graving Dock Co. Ltd. v. Horton : 1951 AC 737 (at p. 761) Lord MacDermot observed: (All ER p. 14C-D)

“The matter cannot, of course, be settled merely by treating the ipsissima verba of Willes, J., as though they were part of an Act of Parliament and applying the rules of interpretation appropriate  thereto.  This  is  not  to  detract  from  the  great weight to be given to the language actually used by that most distinguished Judge.”

20. In Home Office v. Dorset Yacht Co. : (1970) 2 All ER 294 Lord Reid said (at All ER p. 297g-h), “Lord Atkin’s speech … is not to be  treated  as  if  it  were  a  statutory  definition.  It  will  require qualification in new circumstances”. Megarry, J. in (1971) 1 WLR 1062  observed:  “One  must  not,  of  course,  construe  even  a reserved judgment of  even Russell,  L.J.  as if  it  were an Act of Parliament.” And, in Herrington v. British Railways Board: (1972) 2 WLR 537 Lord Morris said: (All ER p. 761c)

“There is always peril in treating the words of a speech or a judgment  as  though  they  were  words  in  a  legislative enactment,  and  it  is  to  be  remembered  that  judicial utterances are made in the setting of the facts of a particular case.”

21. Circumstantial  flexibility,  one additional  or different fact  may make a  world  of  difference between conclusions in  two cases. Disposal of cases by blindly placing reliance on a decision is not proper.”

41.1.6. Read as a whole and with reference to its context, it is but clear that in

Pioneer Urban this Court has not enunciated that the scope of the expression

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‘financial  debt’ be read as if  to encompass any debt of  whatsoever nature.

Rather, a submission made therein, with reference to the decision in  Krishi

Utapadan Mandi Samiti, that ‘and includes’ part in a definition may lead to it

being extensive, was rejected by this Court while holding that the said decision

was not  a  good law.  However,  the  other  extreme of  submissions,  seeking

restrictive interpretation with reference to ‘means’ part of the definition, was

also not accepted and, in that context, the Court observed that the expression

‘and  includes’ speaks  of  subject-matters  which  may  not  necessarily  be

reflected in the main part of the definition. Obviously, there could be several

subject-matters which may not, as such, be found squarely manifested in the

expressions  employed  in  the  ‘means’  part  of  a  definition  and  could  be

reasonably found in the ‘includes’ part. However, it has not been laid down as

a rule  of  statutory  interpretation  that  the  ‘includes’ part  could  stand alone,

disjunct from and totally alien to the ‘means’ part.  

The expressions “means and includes” in the definition clauses - effect

42. Looking  to  the  frame  of  the  Code,  where  the  significant  expressions

“financial creditor” and “financial debt” have been defined with the words “means”

and “includes”, we may further refer to the principles of construction of such a

definition clause in a statute.  Tersely put, the law remains settled that where a

word is defined to ‘mean’ something, the definition is prime facie restrictive and

exhaustive. On the other hand, where the word defined is declared to ‘include’

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something more, the definition is prima facie extensive. However, a little difficulty

arises when the definition contains both the words ‘means’ and ‘includes’52.  

42.1. As noticed, in the case of Pioneer Urban, a suggestion made on behalf

of the respondents with reference to the decision in  Krishi Utapadan Mandi

Samiti, that when the words ‘means and includes’ are used in a definition, they

are to be given a wider meaning and are not exhaustive or restricted to the

items contained therein, was not accepted by this Court; and the statement of

law in Krishi Utapadan Mandi Samiti was held to be not that of good law for it

ignored the earlier precedents of larger and coordinate Benches and was also

out of  sync with the later decisions on the same point.  However, the other

extreme of interpretation, as canvassed by the petitioners, that a financial debt

could only be a debt which is disbursed against the consideration for the time

value of money, and such requirement pervades all sub-clauses (a) to (i), was

also not accepted as a matter of statutory interpretation by this Court while

observing that the expression ‘and includes’ speaks of subject matters which

may not necessarily be reflected in the main part of the definition. Thus, it is

evident that this Court did not accept either of the extremities suggested by the

parties in  Pioneer Urban for interpretation and implication of the expressions

‘means  and  includes’  in  a  definition  clause  of  the  statute. Significantly,  in

52 Craise on Statue Law ( Seventh Ed.-Indian reprint 1999 page 213) has stated this feature as follows: There are two forms of interpretation clause.  In one, where the word defined is declared to

“mean” so and so, the definition is explanatory and prima facie restrictive.  In the other, where the word defined is declared to ”include” so and so, the definition is extensive, e.g. “sheriff” includes “under- sheriff”.  Sometimes the definition contains the words “mean and include”,” which inevitably raises a doubt as to interpretation.

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Pioneer Urban, none of  the extremities had any bearing on the conclusion

because,  eventually,  the  amendment  in  question  was  held  to  be  only

clarificatory  in  nature;  and  this  Court  held  that  the  Explanation added  to

Section 5(8)(f) of the Code by the Amendment Act did not enlarge the scope of

the original Section.  

42.2. Various features of the process of interpretation while dealing with such

definition  clauses  were  explained  by  this  Court  in  the  case  of  Delhi

Development  Authority  v.  Bhola  Nath  Sharma (Dead)  by  LRs  &  Ors:

(2011) 2 SCC 54 in the following:

“25. The definition of the expressions “local authority” and “person interested”  are  inclusive  and  not  exhaustive.  The  difference between exhaustive and inclusive definitions has been explained in P. Kasilingam v.  P.S.G. College of Technology : 1995 Supp (2) SCC 348  in the following words: (SCC p. 356, para 19)

“19.  …  A  particular  expression  is  often  defined  by  the legislature by using the word ‘means’ or the word ‘includes’. Sometimes the words ‘means and includes’ are used.  The use of the word ‘means’ indicates that ‘definition is a hard- and-fast definition, and no other meaning can be assigned to the expression than is put down in definition’. (See Gough v. Gough :  (1891) 2 QB 665 (CA);  Punjab Land Development and Reclamation Corpn. Ltd. v. Labour Court : (1990) 3 SCC 682, SCC p. 717, para 72.) The word ‘includes’ when used, enlarges  the  meaning  of  the  expression  defined  so  as  to comprehend not only such things as they signify according to their  natural  import  but  also those things which the clause declares  that  they  shall  include.  The  words  ‘means  and includes’,  on  the  other  hand,  indicate  ‘an  exhaustive explanation of  the meaning which,  for  the purposes of  the Act,  must  invariably  be  attached  to  these  words  or expressions’. [See Dilworth v.  Commr. of Stamps : 1899 AC 99 (Lord Watson);  Mahalakshmi Oil  Mills v.  State of  A.P. : (1989) 1 SCC 164, SCC p. 170, para 11.]  The use of  the

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words  ‘means  and includes’ in  Rule  2(b)  would,  therefore, suggest  that  the  definition  of  ‘college’  is  intended  to  be exhaustive  and  not  extensive  and  would  cover  only  the educational  institutions falling in the categories specified in Rule  2(b)  and  other  educational  institutions  are  not comprehended.  Insofar  as  engineering  colleges  are concerned,  their  exclusion  may be for  the  reason that  the opening and running of the private engineering colleges are controlled  through  the  Board  of  Technical  Education  and Training  and  the  Director  of  Technical  Education  in accordance with the directions issued by the AICTE from time to time.”

26. In  Bharat  Coop.  Bank (Mumbai)  Ltd. v.  Employees Union : (2007)  4  SCC  685  this  Court  again  considered  the  difference between the inclusive and exhaustive definitions and observed: (SCC p. 695, para 23)

“23. … when in the definition clause given in any statute the word  ‘means’  is  used,  what  follows  is  intended  to  speak exhaustively. When the word ‘means’ is used in the definition … it is a ‘hard-and-fast’ definition and no meaning other than that  which  is  put  in  the  definition  can  be  assigned  to  the same. … On the other hand, when the word ‘includes’ is used in the definition, the legislature does not intend to restrict the definition:  it  makes  the  definition  enumerative  but  not exhaustive.  That  is  to  say,  the  term  defined  will  retain  its ordinary meaning but its scope would be extended to bring within it matters, which in its ordinary meaning may or may not comprise. Therefore, the use of the word ‘means’ followed by the word ‘includes’ in [the definition of ‘banking company’ in]  Section  2(bb)  of  the  ID  Act  is  clearly  indicative  of  the legislative intent to make the definition exhaustive and would cover  only  those  banking  companies  which  fall  within  the purview of the definition and no other.”

27. In N.D.P. Namboodripad v. Union of India : (2007) 4 SCC 502 the Court observed: (SCC p. 509, para 18)

“18.  The word ‘includes’ has different meanings in different contexts.  Standard  dictionaries  assign  more  than  one meaning to the word ‘include’.  Webster’s Dictionary defines the word ‘include’ as synonymous with ‘comprise’ or ‘contain’. Illustrated Oxford Dictionary defines the word ‘include’ as: (i) comprise or reckon in as a part of a whole; (ii) treat or regard as  so  included.  Collins  Dictionary  of  English  Language

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defines the word ‘includes’ as: (i) to have as contents or part of the contents; be made up of or contain; (ii) to add as part of something else; put in as part of a set, group or a category; (iii) to contain as a secondary or minor ingredient or element. It is no doubt true that generally when the word ‘include’ is used  in  a  definition  clause,  it  is  used  as  a  word  of enlargement, that is to make the definition extensive and not restrictive. But the word ‘includes’ is also used to connote a specific  meaning,  that  is,  as  ‘means  and  includes’  or ‘comprises’ or ‘consists of’.”

(emphasis in original)

28. In Hamdard (Wakf) Laboratories v. Labour Commr. : (2007) 5 SCC 281 it was held as under: (SCC p. 294, para 33)

“33. When an interpretation clause uses the word ‘includes’, it is prima facie extensive. When it uses the word ‘means and includes’,  it  will  afford  an  exhaustive  explanation  to  the meaning which for the purposes of the Act must invariably be attached to the word or expression.”

42.3. In the case of Black Diamond Beverages & Anr.  v. Commercial Tax

Office, Central Section, Assessment Wing, Calcutta & Ors.: (1998) 1 SCC

458,  while  examining  a  definition  that  carried  both  ‘means’  and  ‘includes’

expressions, this Court pointed out that the natural meaning of the ‘means’

part of the definition is not narrowed down by the ‘includes’ part. This Court

extracted the definition in question and said,-

“5. The 1954 Act generally provides for levy of a single-point tax at the first stage on commodities notified under Section 25 of that Act. On the other hand, the 1941 Act is a general statute providing for multipoint levy of sales tax on commodities not covered by the 1954 Act. Sub-clause (d) of Section 2 of the 1954 Act reads as follows:

“2. (d) ‘sale-price’ used in relation to a dealer  means the amount of the money consideration for the sale of notified  commodities  manufactured,  made  or processed by him in West Bengal, or brought by him into West Bengal from any place outside West Bengal,

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for the purpose of sale in West Bengal, less any sum allowed as cash discount according to trade practice, but  includes any sum charged for containers or other materials for the packaging of notified commodities;”

(emphasis supplied)

6. We shall first deal with the contention of the appellants’ counsel based upon the non-inclusion of “freight charges” in the definition of sale price in Section 2(d) of the 1954 Act.

7. It is clear that the definition of “sale price” in Section 2(d) uses the words “means” and “includes”. The first part of the definition defines the meaning of the word “sale price” and must, in our view, be  given  its  ordinary,  popular  or  natural  meaning.  The interpretation thereof  is  in  no way controlled or  affected by the second part which “includes” certain other things in the definition. This is a well-settled principle of construction.  Craies on Statute Law (7th Edn., 1.214) says:

“An interpretation clause which extends the meaning of a  word  does  not  take  away  its  ordinary  meaning…. Lord Selborne said in Robinson v. Barton-Eccles Local Board : (1883) 8 AC 798, AC at p. 801:

‘An interpretation clause of this kind is not meant to prevent the word receiving its ordinary, popular, and natural  sense  whenever  that  would  be  properly applicable, but to enable the word as used in the Act … to be applied to something to which it would not ordinarily be applicable.’ ”

(emphasis supplied)

Therefore, the inclusive part of the definition cannot prevent the main provision from receiving its natural meaning.”

The essentials for financial debt and financial creditor

43. Applying  the  aforementioned  fundamental  principles  to  the  definition

occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt

to  become ‘financial  debt’  for  the  purpose  of  Part  II  of  the  Code,  the  basic

elements are that it ought to be a disbursal against the consideration for time

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value of money. It may include any of the methods for raising money or incurring

liability by the modes prescribed in sub-clauses (a) to (f) of Section 5(8); it may

also include any derivative transaction or  counter-indemnity  obligation as per

sub-clauses (g) and (h) of Section 5(8); and it may also be the amount of any

liability  in  respect  of  any of  the guarantee or  indemnity  for  any of  the items

referred to in sub-clauses (a) to (h).  The requirement of  existence of  a debt,

which is disbursed against the consideration for the time value of money, in our

view,  remains  an  essential  part  even  in  respect  of  any  of  the

transactions/dealings stated in sub-clauses (a) to (i) of Section 5(8), even if it is

not necessarily stated therein.   In any case, the definition,  by its very frame,

cannot be read so expansive, rather infinitely wide, that the root requirements of

‘disbursement’ against ‘the consideration for the time value of money’ could be

forsaken in  the manner  that  any transaction could  stand alone to  become a

financial debt. In other words, any of  the transactions stated in the said sub-

clauses (a) to (i) of Section 5(8) would be falling within the ambit of ‘financial

debt’ only if it carries the essential elements stated in the principal clause or at

least has the features which could be traced to such essential elements in the

principal clause. In yet other words, the essential element of disbursal, and that

too against the consideration for time value of money, needs to be found in the

genesis  of  any  debt  before  it  may  be  treated  as  ‘financial  debt’  within  the

meaning of Section 5(8) of the Code. This debt may be of any nature but a part

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of it is always required to be carrying, or corresponding to, or at least having

some traces of disbursal against consideration for the time value of money.

44. As  noticed,  the  root  requirement  for  a  creditor  to  become  financial

creditor for the purpose of Part II of the Code, there must be a financial debt

which is owed to that person.  He may be the principal creditor to whom the

financial debt is owed or he may be an assignee in terms of extended meaning

of this definition but, and nevertheless, the requirement of existence of a debt

being owed is not forsaken.  

45. It is also evident that what is being dealt with and described in Section

5(7)  and  in  Section  5(8)  is  the  transaction  vis-à-vis  the  corporate  debtor.

Therefore,  for  a  person  to  be  designated  as  a  financial  creditor  of  the

corporate debtor, it has to be shown that the corporate debtor owes a financial

debt to such person.  Understood this way, it becomes clear that a third party

to whom the corporate debtor does not owe a financial debt cannot become its

financial creditor for the purpose of Part II of the Code.  

46. Expounding  yet  further,  in  our  view,  the  peculiar  elements  of  these

expressions “financial creditor” and “ financial debt”, as occurring in Sections

5(7) and 5(8),  when visualised and compared with the generic expressions

“creditor” and  “debt” respectively, as occurring in Sections 3(10) and 3(11) of

the Code, the scheme of things envisaged by the Code becomes clearer. The

generic term “creditor”  is defined to mean any person to whom the debt is

owed  and  then,  it  has  also  been  made  clear  that  it  includes  a  ‘financial

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creditor’, a ‘secured creditor’, an ‘unsecured creditor’, an ‘operational creditor’,

and  a  ‘decree-holder’.  Similarly,  a  “debt”  means  a  liability  or  obligation  in

respect of a claim which is due from any person and this expression has also

been  given  an  extended  meaning  to  include  a  ‘financial  debt’  and  an

‘operational debt’.   

46.1. The use of the expression “means and includes” in these clauses, on

the very same principles of interpretation as indicated above, makes it clear

that for a person to become a creditor, there has to be a debt i.e., a liability or

obligation in respect of a claim which may be due from any person.  A “secured

creditor” in terms of Section  3(30) means a creditor in whose favour a security

interest is created; and “security interest”, in terms of Section 3(31), means a

right, title or interest or claim of property created in favour of or provided for a

secured creditor by a transaction which secures payment for the purpose of an

obligation and it includes, amongst others, a mortgage. Thus, any mortgage

created in favour of a creditor leads to a security interest being created and

thereby,  the  creditor  becomes  a  secured  creditor.  However,  when  all  the

defining  clauses  are  read  together  and  harmoniously,  it  is  clear  that  the

legislature  has  maintained  a  distinction  amongst  the  expressions  ‘financial

creditor’,  ‘operational  creditor’,  ‘secured  creditor’  and  ‘unsecured  creditor’.

Every secured creditor would be a creditor; and every financial creditor would

also be a creditor but every secured creditor may not be a financial creditor. As

noticed, the expressions “financial debt” and “financial creditor”, having their

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specific  and  distinct  connotations  and  roles  in  insolvency  and  liquidation

process of corporate persons, have only been defined in Part II whereas the

expressions “secured creditor” and “security interest” are defined in Part I.

47. A conjoint reading of the statutory provisions with the enunciation of this

Court in Swiss Ribbons (supra), leaves nothing to doubt that in the scheme of

the IBC, what is intended by the expression ‘financial creditor’ is a person who

has  direct  engagement  in  the  functioning  of  the  corporate  debtor;  who  is

involved right from the beginning while assessing the viability of the corporate

debtor;  who  would  engage  in  restructuring  of  the  loan  as  well  as  in

reorganisation  of  the  corporate  debtor’s  business  when  there  is  financial

stress.  In other words, the financial creditor, by its own direct involvement in a

functional existence of corporate debtor, acquires unique position, who could

be  entrusted  with  the  task  of  ensuring  the  sustenance  and  growth  of  the

corporate  debtor,  akin  to  that  of  a  guardian.  In  the  context  of  insolvency

resolution process,  this  class of  stakeholders namely,  financial  creditors,  is

entrusted  by  the  legislature  with  such a  role  that  it  would  look  forward  to

ensure that the corporate debtor is rejuvenated and gets back to its wheels

with  reasonable  capacity  of  repaying  its  debts  and  to  attend  on  its  other

obligations.  Protection of the rights of all other stakeholders, including other

creditors, would obviously be concomitant of such resurgence of the corporate

debtor.

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47.1. Keeping the objectives of the Code in view, the position and role of a

person having only security interest over the assets of the corporate debtor

could easily be contrasted with the role of  a financial  creditor because the

former shall have only the interest of realising the value of its security (there

being no other stakes involved and least any stake in the corporate debtor’s

growth or equitable liquidation) while the latter would, apart from looking at

safeguards of its own interests, would also and simultaneously be interested in

rejuvenation, revival and growth of the corporate debtor. Thus understood, it is

clear that if  the former i.e.,  a person having only security interest  over the

assets  of  the  corporate  debtor  is  also  included as a  financial  creditor  and

thereby allowed to have its say in the processes contemplated by Part II of the

Code, the growth and revival  of  the corporate debtor may be the casualty.

Such  result  would  defeat  the  very  objective  and  purpose  of  the  Code,

particularly of the provisions aimed at corporate insolvency resolution.  

47.2. Therefore, we have no hesitation in saying that a person having only

security interest over the assets of corporate debtor (like the instant third party

securities), even if falling within the description of ‘secured creditor’ by virtue of

collateral security extended by the corporate debtor, would nevertheless stand

outside the sect of ‘financial creditors’ as per the definitions contained in sub-

sections (7) and (8) of Section 5 of the Code. Differently put, if a corporate

debtor has given its property in mortgage to secure the debts of a third party, it

may lead to a mortgage debt and, therefore, it may fall within the definition of

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‘debt’ under Section 3(10) of the Code. However, it would remain a debt alone

and cannot partake the character of a ‘financial debt’ within the meaning of

Section 5(8) of the Code.

The respondent mortgagees are not the financial creditors of corporate debtor JIL

48. Indisputably, the debts in question are in the form of third party security;

said  to  have been given by  the  corporate  debtor  JIL so  as to  secure  the

loans/advances/facilities obtained by JAL from the respondent-lenders. Such a

‘debt’ is not and cannot be a ‘financial debt’ within the meaning of Section 5(8)

of the Code; and hence, the respondent-lenders, the mortgagees, are not the

‘financial creditors’ of the corporate debtor JIL.

49. Though several decisions have been cited on behalf of the respondent-

lenders to contend that they do fall within the definition of ‘financial creditor’ but

for what has been discussed hereinabove, it  does not appear necessary to

dilate upon all of them. However, it would be appropriate to take note of the

relevant decisions strongly relied upon by the respondents as infra.  

50. Much emphasis is laid on behalf of the respondents on the observations

occurring in another three-Judge Bench decision of this Court in the case of

Essar  Steel and  predominantly  on  the  observation  therein,  that  “secured

creditors as a class are subsumed in the class of financial creditors”. Again,

the decisions of the Court are required to be understood with reference to the

context. In the case of  Essar Steel,  the questions before the Court related to

the  roles  of  resolution  applicant,  resolution  professional  and  Committee  of

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Creditors  constituted  under  the  Code  and  the  jurisdiction  of  Adjudicating

Authority as also the Appellate Tribunal  in questioning the resolution plans.

The constitutional validity of the Insolvency and Bankruptcy (Amendment) Act,

2019  was  also  under  challenge.  The  problem  arose  essentially  with  the

decision  of  NCLAT  holding  that  in  a  resolution  plan,  there  could  be  no

difference amongst the creditors in that, a financial creditor and operational

creditor deserve equal treatment under a resolution plan. It was in the setup of

such background that in Essar Steel, this Court made the observations relied

upon by the respondents.  

50.1. The referred  observations  in  the  case of  Essar  Steel  are essentially

based on the earlier observations occurring in the case of Swiss Ribbons.  As

noticed,  the  decision  in  Swiss  Ribbons was  rendered  by  this  Court  when

constitutional validity of various provisions of the Code was put to challenge. In

Essar  Steel,  this  Court  reiterated  the  enunciations  in  Swiss  Ribbons in

paragraph 55 in the following:

“55. Financial creditors are in the business of lending money. The RBI report on Trend and Progress of Banking in India, 2017-2018 reflects that the net interest margin of Indian banks for the financial year 2017-2018 is averaged at 2.5%. Likewise, the global trend for net interest margin was at 3.3% for banks in the USA and 1.6% for banks in the UK in the year 2016, as per the data published on the website of the bank. Thus, it is clear that financial creditors earn profit  by  earning  interest  on  money  lent  with  low  margins, generally  being between 1 to  4%.   Also,  financial  creditors  are capital providers for companies, who in turn are able to purchase assets and provide a working capital to enable such companies to run  their  business  operation,  whereas  operational  creditors  are beneficiaries of amounts lent by financial creditors which are then

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used as working capital, and often get paid for goods and services provided by them to  the corporate debtor,  out  of  such working capital. On the other hand, market research carried out by India Brand Equity  Foundation,  a  trust  established by the Ministry  of Commerce and Industry, as regards the Oil and Gas sector, has stated that the business risk of operational creditors who operate with higher profit  margins and shorter cyclical  repayments must needs be higher.  Also,  operational  creditors have an immediate exit  option,  by  stopping  supply  to  the  corporate  debtor,  once corporate debtors start defaulting in payment. Financial creditors may exit on their long-term loans, either upon repayment of the full amount or upon default, by recalling the entire loan facility and/or enforcing  the  security  interest  which  is  a  time  consuming  and lengthy  process  which  usually  involves  litigation.  Financial creditors  are  also  part  of  a  regulated  banking  system  which involves not merely declaring defaulters as non-performing assets but also involves restructuring such loans which often results in foregoing unpaid amounts of interest either wholly or partially. All these differences between financial and operational creditors have been  reflected,  albeit  differently,  in  the  judgment  of  Swiss Ribbons (supra)…..”

50.2. In the relevant part, the Court found that NCLAT had fallen in grave error

in reading paragraph 77 in Swiss Ribbons de hors the earlier paragraphs. In

that context this Court said,-

“56. By reading paragraph 77 de hors the earlier paragraphs, the Appellate Tribunal has fallen into grave error. Paragraph 76 clearly refers to the UNCITRAL Legislative Guide which makes it  clear beyond  any  doubt  that  equitable  treatment  is  only  of  similarly situated creditors. This being so, the observation in paragraph 77 cannot be read to mean that financial and operational  creditors must be paid the same amounts in any resolution plan before it can pass muster.  On the contrary,  paragraph 77 itself  makes it clear that there is a difference in payment of the debts of financial and operational creditors, operational creditors having to receive a minimum payment,  being not  less  than liquidation value,  which does not apply to financial creditors. The amended Regulation 38 set out in paragraph 77 again does not lead to the conclusion that financial  and  operational  creditors,  or  secured  and  unsecured creditors,  must  be  paid  the  same  amounts,  percentage  wise, under  the  resolution  plan  before  it  can  pass  muster.  Fair  and

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equitable  dealing  of  operational  creditors’  rights  under  the  said Regulation involves the resolution plan stating as to how it  has dealt with the interests of operational creditors, which is not the same thing as saying that they must be paid the same amount of their  debt  proportionately.  Also,  the  fact  that  the  operational creditors are given priority in payment over all financial creditors does  not  lead  to  the  conclusion  that  such  payment  must necessarily  be  the  same  recovery  percentage  as  financial creditors.  So  long  as  the  provisions  of  the  Code  and  the Regulations have been met, it  is the commercial wisdom of the requisite  majority  of  the  Committee  of  Creditors  which  is  to negotiate  and  accept  a  resolution  plan,  which  may  involve differential payment to different classes of creditors, together with negotiating  with  a  prospective  resolution  applicant  for  better  or different terms which may also involve differences in distribution of amounts between different classes of creditors.   

57.  Indeed,  by  vesting  the  Committee  of  Creditors  with  the discretion  of  accepting  resolution  plans  only  with  financial creditors,  operational  creditors  having  no  vote,  the  Code  itself differentiates between the two types of creditors for the reasons given above. Further,  as has been reflected in  Swiss Ribbons (supra),  most  financial  creditors  are  secured  creditors,  whose security interests must be protected in order that they do not go ahead and realise their security in legal proceedings, but instead are  incentivised  to  act  within  the  framework  of  the  Code  as persons who will  resolve stressed assets and bring a corporate debtor back to its feet. Shri Sibal’s argument that the expression “secured creditor” does not find mention in Chapter II of the Code, which  deals  with  the  resolution  process,  and  is  only  found  in Chapter  III,  which  deals  with  liquidation,  is  for  the  reason  that secured creditors as a class are subsumed in the class of financial creditors,  as has been held in  Swiss Ribbons (supra).  Indeed, Regulation 13(1) of the 2016 Regulations mandates that when the resolution  professional  verifies  claims,  the  security  interest  of secured creditors is also looked at and gets taken care of….”  

50.3. While strongly relying upon one of the observations occurring in Essar

Steel, that secured creditors as a class are subsumed in the class of financial

creditors,  learned  counsel  for  the  respondents  would  assert  that  secured

creditors do become financial creditors. The submission remains untenable for

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more  than  one  reason.  First,  the  submission  itself  proceeds  on  the  same

shortcoming as was existing in the NCLAT’s decision that was disapproved by

this Court in Essar Steel i.e., reading of a line in a judgment disjunct from the

context.  Secondly,  in  the  decisions  above-referred,  this  Court  has  never

expanded the scope of  ‘financial  debt’ as envisaged by Section 5(8) of  the

Code. Thirdly, the case of an indirect secured creditor i.e., the person having in

its hand only the security interest over the property of the corporate debtor but

with no corresponding involvement in the finances and growth of the corporate

debtor, was never under consideration in the said decisions.  

50.4. We  may  usefully  elaborate  a  little.  On  a  contextual  reading  of  the

expositions in Essar Steel and Swiss Ribbons, it is but clear that the Court had

examined the status of  direct  secured creditor  of  the corporate debtor  and

there  had not  been any  occasion  to  examine the  features  related  with  an

indirect secured creditor, who is neither involved in assessing the viability of

the corporate debtor nor in lending finances to the corporate debtor for setting

up the business. As noticed, the prime, rather only, area of interest of such

indirect secured creditor is in recovery of its debt and not in reorganization of

the corporate debtor’s business. Thus understood, it  is absolutely clear that

the class of secured creditors indicated by this Court in Essar Steel and Swiss

Ribbons, as being subsumed in financial creditors, is only that of such secured

creditors who are directly engaged in advancing credit to the corporate debtor

and not the indirect creditors who had extended any loan or facility to a third

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party but had taken a security from the corporate debtor, whose resolution is

under consideration.

50.5. Hence,  we  are  undoubtedly  of  the  view  that  the  decisions  in  Swiss

Ribbons and Essar Steel do not enure to the benefit of the respondents; rather

on  the  principles  enunciated  therein,  they  only  operate  against  the

respondents.  

51. The case of  Smt. Kusum (supra) has also been repeatedly referred by

the  respondents  in  support  of  their  contentions  that  because  of  the

transactions of mortgage, the corporate debtor JIL owes them the mortgage

debt as a guarantee obligation and hence, it falls within the ambit of ‘financial

debt’ within the meaning of Section 5(8) of the Code.  

51.1. We may have a close look at the relevant background aspects of the

said case of Smt. Kusum. Therein, the appellant-bank had advanced a loan to

the  firm  of  which,  husband  of  the  respondent  was  the  proprietor.  The

respondent had executed an agreement in favour of the appellant-bank to the

effect that so long as her husband’s firm was indebted to the bank, she would

execute,  by way of  collateral  security,  a legal  mortgage of  the immoveable

property, being a flat belonging to her, with or without possession, in favour of

the bank within 14 days of issuance of written requisition for such execution.

Later on, when the bank called upon the respondent to execute the mortgage

as per the agreement, she declined to do so and hence, a suit for specific

performance and in the alternative for damages was filed by the appellant-

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bank. The Trial Court, however, dismissed the suit while holding, inter alia, that

the agreement in question was without consideration. The suit was dismissed

on certain other grounds too with which we are not concerned herein.   

51.2.  In  appeal  by  the  bank,  the  High  Court,  while  holding  that  the

agreement to create a mortgage was specifically enforceable, proceeded to

examine the question as to whether the promise to create mortgage, if given

by a third party and not by the borrower, is for consideration and is valid. The

High Court held that by making the promise, the respondent had agreed to

provide collateral security and thereby to discharge the liability to a third party

in case of his default. The Court observed that such guarantee was limited to

the security offered and no personal liability by the promisor; and thus, the

promisor became a surety and referred to Sections 126, 127 and 128 of the

Contract Act.

51.3. With reference to Section 128 of the Contract Act, the Court pointed

out that the liability of a surety is ordinarily coextensive with that of the debtor

but in the case at hand, such liability of the surety was as otherwise provided

by  the  contract;  and  such  liability  of  the  respondent  was  to  the  extent  of

securing the dues by creation of mortgage. The Court said that as the principal

debtor could create a mortgage of his immoveable property,  a third person

could also agree to create a mortgage so as to secure the dues of the principal

debtor.  As  regards  the  consideration,  the  Court  said  that  though no  direct

consideration had flowed from the appellant to the respondent but, in such

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tripartite agreement,  anything done for the benefit  of  the principal debtor is

sufficient consideration to the surety for giving guarantee. For their relevance,

we may notice the relevant parts of paragraphs 12,13,14,17 and 21 of the said

decision in Smt. Kusum as follows:-

“12. The next  question  that  arises  is  whether  such promise  to create  a  mortgage,  if  given  by  a  third  party  and  not  by  the borrower or the principle debtor, is for consideration and is valid. The learned trial Judge has held that for creating mortgage, the mortgagor  must  be  a  debtor  and  must  have  right  to  redeem mortgage on payment of the debt and since the present defendant was not the debtor, she could not create a mortgage in respect of that debt and that the mortgagor should be a debtor and there must be a relationship of debtor and creditor, the mortgage being a security for the debt. The learned trial Judge has also held that there was no consideration for giving this promise of executing the mortgage.  Both  these  aspects  are  interrelated.  By  making  the promise  by  Ex.  20,  defendant  has  agreed to  provide  collateral security  of  a  legal  mortgage  to  secure  repayment  of  all  the moneys due from Nitin Pharmaceuticals. Thus, the defendant has promised to discharge the liability of a third person (the debtor) in case of his default. This guarantee is limited to the security offered by the promisor,  namely,  the mortgage and no further personal liability is taken by the promisor. Thus, the promisor has became a surety and this would be an agreement to offer security for due performance of that promise and to that extent. Sections 126, 127 and 128 of the Contract Act read as follows:

*** *** ***

13.  The liability  of  the surety  is  co-extensive with  that  of  -  the debtors. However, in the present case, the liability of the surety is as  otherwise  provided  by  the  contract  Ex.  20.  Therefore,  the liability of the defendant is as provided in the agreement and to that  extent  of  securing  dues  by  a  creation  of  mortgage,  no personal  liability  is  accepted  by  the  surety.  It  is,  therefore, fallacious to say that the defendant is not a debtor and, therefore, the defendant could not have created a mortgage in favour of the creditor. The defendant has rendered himself liable to the dues of Nitin Pharmaceuticals by agreeing to provide security in the form of mortgage for the dues. Just as the principal debtor can create a

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mortgage of  his  immovable properties,  a  third  person can also agree  to  create  a  mortgage  so  as  to  secure  the  dues  of  the principal debtor. In that manner, he becomes a surety to the extent of the security or the mortgage. If that were not so, the present commercial and banking transactions would not be possible and would be hampered to a great extent. In the present day world of commerce, a person may not have sufficient security to offer for obtaining  advances  from  financial  institutions  even  though satisfying  the  requirements.  In  such  cases,  he  draws  upon resources of others by asking them to give guarantee and also security for the performance of that guarantee and it is a perfectly legitimated  and  legal  way  of  conducting  such  commercial transactions. In fact, Chapter VIII of the Contract Act deals with indemnity  and guarantee and provides for  this  kind of  tripartite arrangement.

14. As regards consideration, it is true that no direct consideration has flowed from the plaintiff to the defendant who has made the promise to create a mortgage. But in such tripartite arrangement, anything done for the benefit of the principal debtor is a sufficient consideration  to  the  survey  for  giving  guarantee  as  expressly provided in Section 127 of the Contract Act. Thus, even though there is no consideration to the third party-surety for mortgages, the consideration of having done anything for the benefit  of the principal debtor is a sufficient consideration.

*** *** *** ***

17.  In the present case, the consideration that anything done for the benefit of the principal debtor is a sufficient consideration to the surety.  Anything done in the present  case is that  the loans advanced  to  the  principal  debtor  who  is  the  husband  of  the present defendant. She has agreed to give collateral security to secure the dues in default of payment by her husband. Apart from the close relationship of  husband and wife,  there is substantial consideration by having advanced the loan. *** *** *** ***

21. Thus, the plaintiff not enforcing the claim against the principal debtor or even the third person may be sufficient consideration by the debtor or third person to give security for the debt and the consideration for such promise is that by such forbearance, the creditor is delayed and the debtor or third party is benefited. It is  

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also seen that even in absence of express promise to forbear, a simple forbearance from enforcing the claim can be held to have been implied in the present case. This promise and agreement was given in 1975 and it is clear that thereafter for two years, the claim  was  not  pressed  which  shows  that  there  is  actual forbearance  against  the  principal  debtor  after  this  Ex.  20  was executed. Thus, even under the English Law, this consideration is held to be good and sufficient consideration. Under Indian Law, which is significantly different from English Law of Contract, past consideration  or  the  consideration  towards  third  person  is statutorily held to be good consideration as defined in Section 2(d) and  as  mentioned  in  Section  127  of  the  Contract  Act.  The observation of the learned trial Judge that as the husband of the defendant had to pay Rs. 5 lacs to the plaintiff, the writing Ex. 20 which  is  subsequently  obtained  is  without  consideration,  is patently erroneous. In the present case, it is amply clear that the principal debtor was a defaulter in meeting his financial obligations to  the  bank  and  the  bank  had  noticed  the  irregularities  in  his accounts  and  the,  bank  could  have  proceeded  against  the principal debtor to effect recovery. At that stage, at the instance of the principal debtor-husband, wife comes forward and agrees to give  collateral  security  obviously  to  secure forbearance against the  principal  debtor.  Thus,  at  the  desire  of  the  promisor (defendant)  the  bank  has  abstained  from  enforcing  its  claim against the principal debtor and has forborne itself from suing the husband. Such forbearance is sufficient  and valid consideration for  the  promise  made  by  the  defendant  to  agree  to  create mortgage and give collateral security. The learned Trial Judge is in error in observing that "an act done at the desire of third party is not  a  consideration."  It  must,  therefore,  be  held  that  the  suit agreement Ex. 20 is for sufficient and valid consideration and is valid and enforceable.”

51.4. The said decision in Smt. Kusum, at best, leads to the position that a

promise to create a mortgage, even if given by a third party and not by the

borrower  would  be  deemed to  be  for  consideration;  that  even if  no  direct

consideration  had  flown  from the  plaintiff  to  the  defendant  who  made  the

promise to create the mortgage, anything done for the benefit of the principal

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debtor would be sufficient consideration to the surety for giving guarantee as

provided under Section 127 of the Contract Act. When the creditor abstained

from enforcing the claim against the principal debtor because of such promise

to  create  mortgage  by  the  defendant,  such  forbearance  was  held  to  be

sufficient and valid consideration. It is difficult to stretch the ratio of the said

decision so as to be applied to the issue at hand concerning the definition of

“financial  debt”  under Section 5(8)  of  the Code,  which conspicuously omits

mortgage; and which requires  “disbursement” against  “the consideration for

the  time  value  of  money”  as  the  lead  elements.  As  said,  the  respondent-

lenders of JAL, while holding the mortgages in their hands, as said to have

been executed by the corporate debtor JIL, may be carrying a security interest

and may be the creditors who may claim to be falling within the terminology

‘secured creditors’,  yet  cannot  become ‘financial  creditors’ of  the corporate

debtor JIL who is not owing any ‘financial debt’ to them. The decision in Smt.

Kusum does not make out a case in favour of the respondents, the lenders of

JAL.  

52. Another decision forming the mainstay of the respondents had been that

in the case of  Rajkumari  Kaushalya Devi (supra).  The relevant background

aspects  of  the  said  case  had  been  that  the  appellant  had  executed  two

usufructuary  mortgages  with  respect  to  the  two  properties  situated  in

Feroozepore  city  in  favour  of  the  respondent  while  also  taking  the  same

property  on  lease on  the  very  same date  in  1946.  On default  in  effecting

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payments by the appellant, the respondents filed an application under Section

13 of  the  Displaced Persons (Debts  Adjustment)  Act  70 of  195153 seeking

recovery of the principal amount together with arrears of rental. While omitting

other  aspects  which  may  not  be  relevant,  noticeable  it  is  for  the  present

purpose that one of the points for consideration in the case had been as to

whether the liability created under the said mortgage was a ‘debt’ within the

meaning of Section 2(6) of the Act 70 of 1951. It was contended on behalf of

the appellant that such liability under the mortgage was not a pecuniary liability

and, therefore, Section 2(6) did not apply to a mortgage debt.  

52.1. The argument aforesaid was rejected by this Court after taking note

of the definition of ‘debt’ as occurring in the said enactment. The principal part

of the said definition, relevant for the present purpose read as under:-  

“ ‘Debt’ means any pecuniary liability, whether payable presently or in future, or under a decree or order of civil or revenue court or otherwise, or whether ascertained or to be ascertained, which — *** *** ***”

52.2. This  Court,  inter  alia, observed,  with  reference  to  the  definition

aforesaid as occurring in Act 70 of 1951 and the definition of ‘mortgage’ as

occurring in the Transfer of Property Act, as under:

“3….The main contention of the appellant in this connection is that a mortgage debt is not a pecuniary liability and therefore does not fall within the definition of debt at all. We are of opinion that there is no force in this contention. The words “pecuniary liability”  will  cover any liability which is of  a monetary nature. Now the definition of a mortgage in Section 58 of the Transfer of Property Act 4 of 1882, shows that though it is the transfer of an

53 ‘Act 70 of 1951’ for short

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interest  in  specific  immovable  property,  the  purpose  of  the transfer is to secure the payment of money advanced or to be advanced by way of loan or to secure an existing or future debt or the performance of an engagement which may give rise to a pecuniary  liability.  The  money  advanced  by  way  of  loan,  for example, which is secured by a mortgage, obviously creates a pecuniary  liability.  It  is  true  that  a  mortgage  in  addition  to creating  the  pecuniary  liability  also  transfers  interest  in  the specific  immovable  property  to  secure  that  liability;  none  the less the loan or debt to secure which the mortgage is created will  remain  a  pecuniary  liability  of  the  person  creating  the mortgage. Therefore a mortgage debt would create a pecuniary liability  upon  the  mortgagor  and  would  be  covered  by  the definition of the word “debt” in Section 2(6)….”  

52.3. The proposition aforesaid, being related with the definition of ‘debt’

as occurring in the said enactment  (Act  70 of  1951),  cannot  have a direct

application in the present  case.  In any event,  the said  decision cannot  be

taken as an authority governing the transaction where there is no direct debt of

the mortgagor himself.   

53. The other citations, on various terminologies related with mercantile law

and  mortgage transactions,  do  not  advance  the  cause  of  the  respondents

because of  distinct  and rather peculiar  requirements of  Section 5(8)  of  the

Code.  Of  course,  the  decision  of  NCLAT  in  SREI  Infrastructure  Finance

Limited (supra)  stands  disapproved  for  what  we  have  held  hereinabove.

Equally,  the  other  submissions  about  the  contents  of  the  documents  in

question as also the entitlement of respondent-lenders to invoke the security

or to take up the proceedings under SARFAESI Act etc. do not, in any event,

make  the  transactions  in  question  ‘financial  debts’  within  the  meaning  of

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Section  5(8)  of  the  Code.  Such  submissions  have  only  been  noted  to  be

rejected.  

Summation on second issue

54. For what has been discussed hereinabove, on the issue as to whether

lenders  of  JAL could  be  treated  as  financial  creditors,  we  hold  that  such

lenders of JAL, on the strength of the mortgages in question, may fall in the

category of secured creditors, but such mortgages being neither towards any

loan, facility or advance to the corporate debtor nor towards protecting any

facility or security of the corporate debtor, it cannot be said that the corporate

debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the

Code;  and  hence,  such  lenders  of  JAL do  not  fall  in  the  category  of  the

‘financial creditors’ of the corporate debtor JIL.

Conclusion

55. Accordingly, and in view of the above, these appeals are allowed to the

extent and in the manner that:

1) The impugned order dated 01.08.2019 as passed by NCLAT in the

batch of appeals is reversed and is set aside.  

2)  The  appeals  preferred  before  NCLAT  against  the  order  dated

16.05.2018, as passed by NCLT on the application filed by IRP, are dismissed;

and consequently, the order dated 16.05.2018 so passed by NCLT is upheld in

regard to the findings that the transactions in question are preferential within

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the meaning of Section 43 of the Code. The directions by NCLT for avoidance

of such transactions are also upheld accordingly.  

3) The appeals preferred before NCLAT against the orders passed by

NCLT dated 09.05.2018 and 15.05.2018 on the applications filed by the lender

banks  are  also  dismissed  and  the  respective  orders  passed  by  NCLT are

restored with the findings that the applicants are not the financial creditors of

the corporate debtor Jaypee Infratech Limited.  

Acknowledgement

56. While  closing  on  these  appeals,  we  put  on  record  our  thanks  and

compliments to the learned counsel  for  the respective parties as also their

associates  and  researchers  for  erudite  and  scholarly  presentation  of  their

respective view-points, in oral as also in written submissions and in rendering

invaluable assistance to the Court in dealing with the vast variety of questions

involved in these matters.

………………….….J.            (A.M.Khanwilkar)

………………….….J.          (Dinesh Maheshwari)

New Delhi,

Dated: 26th February, 2020.

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